“All Models are Wrong”—The challenge of modelling ‘deep decarbonisation | Paper

This paper summarises the dilemma associated with using mainstream, macroeconomic models to guide disruptive, transformative change such as those that might occur under ‘deep decarbonisation’: a rapid transition to a net-zero carbon economy. On the one hand, some form of macro-economic modelling framework is essential to enable policy-makers to exercise short- and long-term fiscal responsibility. On the other hand, incremental models based on historical behaviour are a poor guide to outcomes under circumstances of disruptive change. The paper briefly reviews the current UK government modelling framework and highlights its relative advantages and shortcomings. It then proposes a pragmatic approach to the challenge based on ‘living with’ the existing framework for now, whilst providing an early signal to establish a ‘new Treasury model’ based on commissioning an immediate in-depth review of the challenge. Such a review could usefully address a range of issues, including: the appropriate remit of a new Treasury model; the institutional architecture of (and responsibilities for) macroeconomic modelling across government; and a set of proposed responses to the challenges associated with modelling disruptive change. Finally, the paper points briefly to a deeper issue on which a transformational economics will depend: the limitations of GDP itself as a measure of economic welfare.