Is the Paris Agreement Good for Society and the Economy?

21 November 2016

With a deal ratified from the recent Paris Climate Conference, attention now turns to the difficult task of actually achieving national emissions reduction targets. This will involve a delicate trade-off between different policies and investments, each with varying overall welfare benefits to society and financial returns to investors. In other words, with the same potential to reduce emissions, how to select between an intervention option that is costly, but generates a substantial number of jobs; and a second one that costs less, but does not contribute to employment creation?

As governments often prioritize the former (welfare benefits to society) while markets favor the later (cost minimizing interventions), climate change and green growth policies will continue to be a battleground of competing interests. New types of data and information will be required to bridge these gaps and illuminate common ground.

Much of the most influential analysis preceding the Paris conference projected more generalized outcomes of a climate agreement. There was extensive analysis of whether the collective national pledges would achieve or exceed a 2 degree Celsius warming threshold or the total technological investment required to realize these targets. This analysis helps answer a critical question: will these pledges, collectively, reduce global warming sufficiently, thereby increasing the wellbeing of billions of people around the world?

But another question remains to be answered, and this has to do with local circumstances: will national pledges contribute to social and economic development at the local level? In other words, will we continue to see political battles and tradeoffs between climate change action and the national desire for economic development?

Indicators and historical trends are not sufficient to shed light on the likely impacts of actions to mitigate and adapt to climate change, as indicated in the book Tackling Complexity, which identifies guidelines to avoid common pitfalls and increase policy effectiveness through the use of system analysis. Further, every country is characterized by a unique socio-economic and environmental context, calling for a customized analysis of the impact of policy interventions. Systems analysis – and similar modeling techniques for understanding relationships in complex systems like carbon economies – has played a limited role so far. Yet because emission reductions have consequences for so many parts of the economic system, it could help decision makers as they begin to implement the Paris agreement, as indicated through very simple games in this Systems Thinking Playbook.

We recently modeled eleven of the largest carbon emitters using a systems approach. The goal of this effort was to calculate how to allocate investments in renewable energy and energy efficiency to achieve the highest welfare, given the diverse underlying conditions in each market. Some of the country-specific results are instructive, in ways that more one-dimensional economic analyses lack.

For example, in a large, developing market with high emissions like China, a systems analysis illuminates linkages and trade-offs between renewable energy investment and employment. This matters because in China, employment creation will remain a priority and climate-related policies will be formulated with this in mind. Given that the labor intensity in China for solar PV is 50% higher than the world average, policymakers there will continue to favor solar panel manufacturing as a strategy for employment and income creation, which in turn would stimulate domestic consumption and economic growth. The level of investment required will depend on whether domestic solar companies increasingly sell directly to the Chinese market, as opposed to abroad where higher prices can be realized.

In a large, developed market with high emissions like the United States, a systems analysis would produce a different result. Rather than favoring a labor-intensive sector like solar PV in China, emphasis in the U.S. should be placed on developing new technologies, given the high level of education and mature economy. In addition to boosting energy efficiency and reducing demand, these new technologies can be exported, enhancing U.S. industrial competitiveness. A systems analysis would also reveal alternatives to domestic investment, as the U.S. could import hydropower-generated electricity from neighboring Canada, a relatively inexpensive option that would also benefit Canada’s export-driven economy and the recent announcement of the introduction of a country-wide carbon pricing mechanism

In countries like India and Indonesia, the challenges are more diverse and linked to localized challenges. In India, the greatest welfare gains are from improving energy security, mostly through distributed power generation. Improving energy security would support economic growth in rural areas, increasing SME competitiveness in the process. In Indonesia, systems analysis is critical to better understanding how to manage the high levels of land-based emissions. As the forest and peat fires from last few years indicate, there are regional costs to unsustainable land use practices in Indonesia. But these practices also increase the productivity of land from a short-term economic perspective, generating rural income in a similar way that deforestation accrued profits to local landowners. A systems analysis supports policymakers as they attempt to reconcile these social, economic and environmental factors.

As policymakers start to get serious about realizing economy-wide emissions reductions, a new more integrated analysis will be required. This is already becoming evident in many climate-related fields, and across organizations. Rather than treating social welfare and financial returns as distinct and sometimes mutually exclusive, systems analysis can be useful in clarifying both the trade-offs and synergies between policies and investments designed to reduce emissions and mitigate the adverse effects of climate change.

Dr. Andrea M. Bassi and Jeremy Tamanini are independent consultants and co-authors of “The Climate Moment: Anticipating New Energy Markets, Investment Risks and Opportunities & Jobs in the Low Carbon Economy.”


The opinions expressed herein are solely those of the authors and do not necessarily reflect the official views of the GGKP or its Partners.

Founder and CEOKnowledge SRL
Extraordinary Associate Professor of System DynamicsStellenbosch University
Founder, Lead Consultant, Dual Citizen