Economic transformation needs long-term planning. But how do we get there?

The beauty of functioning markets is the “invisible hand”, as Adam Smith called it, that almost magically arranges the best possible outcome for society. The very nature of climate change is that markets are dysfunctional, and fail to produce a good outcome for society. Markets simply fail to factor in the true cost of burning fossil fuels and the burden this places on society. Economic theory calls this an “externality”, that needs to be addressed by a corrective mechanism, to enable the transformation to a better outcome. But what is this desired ‘best possible’ outcome? Unfortunately, we need to know this first, at least approximately, to design the right corrective mechanism. This transformation requires an envisaged target state, and an implementation plan to reach it. Proposals for such plans have been published. Yet, interestingly, only few of these plans are based on scientific models that factor in the entire economy and its climate impact. However, several such models do exist.

Those who are willing to implement transformation steps are left with a challenge: which model and recommended plan should be used as a guard rail? The model must be based on 1.5 degree, low/no overshoot. But otherwise there has been little guidance.?

Investors, for example, need to compare these models to get input for ‘robust’ transformation plans for their investment portfolios. ‘Robust’ also implies that assumptions made and chosen modeling techniques, are assessed and understood. To set this work into motion, model outputs like sector pathways can be considered. One example of this, is emissions over time in one industry sector, described by four different models.?Steel emission intensity is used here to demonstrate this:

Highly valuable input can be created, by getting scientists (the owners of the models), to discuss and possibly align their approaches. This can help explain the reasons for output differences. Also, value is added when industry sector representatives ensure that their experts check the model outputs for practicability, and deviations from existing plans of leading industry players.

The analytic work described here is just a first step towards identifying the long term guard rails that?guide us towards?a better future on. Companies need to develop an understanding of this scientific modeling. Such an understanding is the basis for transformation targets. And perhaps more importantly, it is the basis for alignment with stakeholders on how a company's targets?fit?with the larger economic transformation, and how?these?will enable?the company to take opportunities.