To better understand the leadership role government can play, EY collaborated with a team of academic economists and public policy experts at Politecnico di Milano in Italy throughout 2022 to model possible pathways for governments to lead a green transition. This group and advisory board conducted methodical research to create projections of major macroeconomic, financial and real energy impacts through 2050.
The analysis is based on an input output stock-flow consistent model (IOSFC), a technique that accounts for how energy is produced in (with financial and human capital), and how it flows through (as an input into production and consumption), the economy.
In business parlance, IOSFC modeling techniques generate an economy-wide integrated set of financial, economic and physical energy accounts, describing changes to both the balance sheet (e.g., stocks of assets) and the income statement (e.g., flows of energy, goods and services) in a consistent fashion. The technique produces realistic projections of major macroeconomic, financial and real energy variables, enabling a detailed understanding of the feasibility of different transition pathways subject to social, political and economic constraints such as government debt ratios and the unemployment rate.
In this instance, the dataset for this model covered three regions, Europe, the USA, Asia, the Middle East and Australia, which together represent 75% of global GDP and 80% of global CO2 emissions.