More than 200 economists called on the European Commission to overhaul the way it calculates its core economic forecasts and better integrate critical environmental factors into its baseline models in an open letter obtained exclusively by Euractiv on Thursday (15 February).

The letter, backed by world-leading economists including Mariana Mazzucato, Steve Keen, Jason Hickel, and Kate Raworth and overseen by the Greens/EFA European Parliamentary group, warns that models currently relied upon by the Commission for crucial forecasts and policy discussions risk failing to factor in the most pressing challenges that real-world 21st-century economies are facing.

“The choice of model to inform decision-making is clearly non-neutral. This theoretical choice will from the very start determine part of the outcome of the recommendations emanating from the model used,” the letter said.

Policy decisions influenced by model biases

At present, the Commission – and therefore the EU at large, the group of high-profile economists argued – still relies on models that are strictly informed by general-equilibrium principles that may fail to capture the impact of growing climate-related variables on countries’ economic performance, including increased headwinds of financial and economic instability.

“Some model structures and core assumptions naturally tend to favour market-based solutions over regulation-based solutions,” it  said.

“By construction, some models’ classes will systematically advocate against European expansionary policy packages and large-scale investments required to reach carbon neutrality.”

Conversely, policymakers should broaden and diversify the scientific inputs that serve as the basis for policy decisions and directions. Incorporating tools developed by ecological economists into the EU modelling toolbox would “significantly enhance” the Commission’s forecasting abilities, the group said.

Mainstream economics not changing fast enough

Philippe Lamberts, co-president of the Greens/EFA group, told Euractiv that the tenets of ecological economics appear to be gaining increasing acceptance among mainstream economists.

“I think there’s a growing realisation in the world of macroeconomics that something is not working,” he said.

However, Eva Alfredsson, an economist at Uppsala University in Sweden, warned that the acceptance of ecological economic principles by mainstream forecasters “is not happening fast enough”.

“We are in the middle of a climate crisis and need to act rather fast,” she said.

Other independent experts contacted by Euractiv — none of whom were formerly aware of the letter — all supported the call for contemporary forecasting to include the lessons and principles of ecological economics.

Doing this, they added, would improve models’ ability to accurately predict ‘standard’ economic metrics such as inflation and enhance their capacity to measure the environmental impact of government policies. 

“They don’t have the right input data [so they] will not get the right output data,” said Kristian Skånberg, an affiliated researcher at the Stockholm Environment Institute (SEI).

“And as [environmental issues] are becoming increasingly important and there are repercussions from the climate and there are repercussions from shortages, [they] will affect inflation and … GDP,” he added.

A more thorough reality check?

Heather Grabbe, a senior fellow at Bruegel think tank, noted that economic models “have long treated environmental impacts as externalities” and that the way they are constructed tends to create a bias against large-scale green investments.

“Recent research on the macroeconomic impact of climate change and environmental degradation needs to be included in the models used by policymakers,” she said. “They need to include not only the costs of climate action but also the costs of inaction.”

Stefan Sipka, head of the Sustainable Prosperity for Europe programme at the European Policy Centre (EPC) agreed that, when designing economic policies, leaders need to take into account the impact of climate change and other sustainability challenges.

“I would say that our current approach to economics and related modelling is still based on old premises that don’t really take into consideration that we live in a world with limited resources,” he said.

Showing the impacts of different policies on the environment and the economy might bear some hard-to-swallow results, though.

Sipka said data might show that farmers, for example, would have to “pay a higher price for the green transition” than previously thought.

On the other hand, models accounting for the economic impact of environmental policies might show that some green measures, like improving cities’ air quality and circular economy, have positive economic effects.

Sipka noted that, overall, using more accurate models is economically worthwhile. “In the long run, [these models] will ensure more prosperity for Europeans,” he said.

[Edited by Anna Brunetti/Zoran Radosavljevic]

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