The ecological transition is a unique type of structural change: green industries grow while greenhouse gas-intensive and non-green industries decline. This complex process affects the productive, trade and financial structure of national economies, which can generate transition risks. 

These risks arise from the dependence of economies on high greenhouse gas emitting industries, which constrains their low-carbon transition: 

• External risk: if a country depends on greenhouse gas-intensive industries as a source of foreign exchange, the transition will affect its balance of payments and the country's ability to import goods and services (including the machinery and inputs needed for the transition);
• Fiscal risk: if a country relies on emission-intensive industries as a source of tax revenue, the transition will reduce its budgetary resources, which are needed for public investments relevant to the transition (green infrastructure, social spending...);
• Socio-economic risk: if a country relies on emission-intensive industries as a source of employment, the transition will lead to the destruction of jobs in certain sectors, making targeted measures necessary (social protection, training, etc.).

However, not all countries are equal in the face of the ecological transition: they are affected differently by these changes, depending on the structure of their economy and their trade relations with other economies. 

The ESTEEM model has been developed to identify and better understand these risks, so as to be able to define the most appropriate trajectory for each country.

The ESTEEM macroeconomic model is a tool developed by AFD to understand countries' transition trajectories, in order to:

• Assess the extent to which their economy is exposed to risks of imbalances in the context of a green transition, by identifying the main macroeconomic constraints that may emerge and how they can be addressed to ensure an adequate transition path;
• Take into account the ecological and environmental specificities of countries, as they are more or less exposed to transition risks depending on the structure of their economy.

The research paper "Developing countries' macroeconomic exposure to the low-carbon transition" presents the methodology for assessing countries' exposure to external, fiscal and socio-economic risks. Based on their capacity to adapt their productive structure, it analyses countries' vulnerabilities and risks in these three dimensions. Using an environmental input-output table for 189 countries, it identifies carbon-intensive industries and then estimates each country's direct and indirect dependence on these industries.

Besides the above research paper, which provides a comprehensive analysis, other studies have been developed. The paper "Impacts of CBAM on EU trade partners: consequences for developing countries", for example, uses the ESTEEM model to analyse the impact of the border carbon adjustment mechanism (CBAM) on the European Union's (EU) trade partners. While most analyses of CBAM have focused on the consequences for EU economies, this research paper focuses on developing and emerging economies.

In addition, AFD is conducting ESTEEM projects in Uzbekistan and Vietnam, in which the ESTEEM model is used to provide the authorities of these two countries with an analysis of the macroeconomic impacts of their low-carbon transition. 

Finally, based on the original ESTEEM project, other studies are being developed: 

• ESTEEM-Biodiv seeks to understand the risks linked to ecological dimensions other than dependence on carbon-intensive industries (water stress, excessive land use, pollution, etc.);
• ESTEEM-Dynamic, which started in 2022, seeks to understand how the systemic impacts of a transition vary according to the trajectory or scenario selected. This new model, which is dynamic, does not take economic structures as given: by allowing certain variables to be modified, it makes it possible to assess which are the most appropriate paths to follow in order to reduce the risks of transition and ensure the effectiveness of a transition.

The studies show that, depending on the structure of their economy, their budgetary leeway and the robustness of their social protection system, countries are more or less exposed to the risks and vulnerabilities generated by a transition to a low-carbon economy. The ESTEEM model, by making it possible to identify these risks, helps to anticipate them in order to promote the success of the transition.

The interest of the national applications of ESTEEM – currently in Uzbekistan and Vietnam – is to provide an analysis taking into account the specificities of each country:

• Uzbekistan: although Uzbekistan does not rely much on declining industries, the Uzbek economy is a high emitter of greenhouse gases in key transition sectors, such as electricity and construction. This means that decoupling trajectories requires productive and technological capacity building actions to ensure an adequate transition trajectory, leading to job creation and avoiding fiscal and external imbalances.
• Vietnam: the analysis shows that Vietnam is a highly exposed economy at socio-economic level, particularly because high-paying jobs are located in declining industries. Furthermore, the analysis of the different climate scenarios shows that the economy is very exposed because the country's agriculture will be strongly impacted. Nevertheless, Vietnam is also a very dynamic economy with a strong capacity to migrate to green products, which can contribute to the success of the transition.

Find out more: 

• Developing countries' macroeconomic exposure to the low-carbon transition (AFD Research Papers, October 2021)
• Low-carbon transition: What macroeconomic vulnerabilities for developing countries? (Research Conversation webinar, December 2021)
• Low-carbon transition in Latin America: what are the risks and the main constraints? (Development Matters, OECD blog, June 2022)
• Impacts of CBAM on EU trade partners: consequences for developing countries (AFD Research Papers, March 2022)

Tunisia is particularly exposed to the impacts of climate change, on environmental, social and economic levels. Due to inappropriate agricultural practices, the availability of water resources has decreased, the salinisation process has worsened, and land and plant cover have experienced significant degradation. Since September 2018, the Tunisian Institute of Competitiveness and Quantitative Studies and the Tunisian Ministry of Agriculture have been working in collaboration with AFD on the development of a macroeconomic model within the GEMMES programme to make projections of agricultural yields until 2050 and to consider possible policies. 

This project is part of the modelling work that integrates the impact of climate change into macroeconomic forecasts in order to inform public policy choices in this area. AFD is developing a general theoretical model on the one hand, and national models applied to concrete cases and adapted to the characteristics of each country on the other, including the GEMMES Tunisia model. 

This partnership is carried out in the context of the memorandum of strategic dialogue between AFD and the Tunisian Ministry of Development, Investment and International Cooperation. This collaboration involves the joint production of studies, diagnoses and modelling tools to promote inclusive and sustainable development policies.

The objective of the GEMMES Tunisia project is to analyse the macroeconomic effects of climate change on agriculture. By modelling development trajectories, it improves the understanding of the interactions between the economy and the environment, and helps inform public decision-making.

Aspiring to promote exchanges between researchers and political decision-makers, this project aims to place the issues of ecological transition and strong sustainability at the heart of political dialogue. It thus aims to become a tool at the service of the Tunisian authorities, by helping to evaluate the advantages of adaptation policies that could possibly be implemented.

The GEMMES model is based on a trans-disciplinary analysis, which is able to take into account sectoral heterogeneity, whether in terms of market structures, access to financial markets or employment, as well as the structural imbalances inherent in a change as profound as climate change. GEMMES Tunisia is using this method to test different scenarios concerning the mechanisation of agricultural production, the improvement of agricultural practices and investment in water resources. 

The GEMMES Tunisia project was divided into three phases:

1. The first year was devoted to identifying the macroeconomic and ecological fragilities due to the impacts of climate change on agriculture and the water cycle.
2. The second year focused on the construction of the macroeconomic framework and the choice of the agricultural model.
3. The third year was dedicated to combining the macroeconomic model and the water cycle model by adding agricultural dynamics.

The scenarios established by the GEMMES Tunisia model confirmed that the implementation of adaptation policies is necessary and desirable:

• The absence of such policies would lead to a significant increase in external debt, which would reduce the value of the national currency and thus the purchasing power of the population, while threatening the country's food security. Similarly, food inflation is reaching very high levels, which will have a massive impact on increasing poverty among Tunisian households.
• The benefits of sustainable development policies outweigh its costs by limiting the rise in rural unemployment, rapid urbanisation and declining per capita incomes. As an important result, the social and economic benefits of the adaptation policies envisaged for Tunisia are even higher if these policies are financed by low-cost foreign currency loans from climate funds, green bonds or international financial institutions. In this case, the adaptation policies have a much more beneficial effect and the costs of food imports put much less pressure on the balance of payments, food inflation, the exchange rate and thus the per capita income of Tunisian households.

Thus, the results of this project are in line with AFD's positioning in favour of strong sustainability.

This research project also highlighted the difficulty of quantifying the impacts of climate change in a context of limited data availability. Nevertheless, producing national models in this context has prompted research teams to test a greater diversity of scenarios or to gather different data sources, for example. 

Contact:

• Devrim Yilmaz, senior economist in the GEMMES Macroeconomic Modelling Unit, AFD