Brazil’s current development model, characterized by intensive use of natural resources and environmental degradation, has caused serious social and economic consequences. Additionally, the country faces the impacts of environmental degradation (extreme weather events, scarcity of natural resources, loss of biodiversity, reduced agricultural productivity…), that affect the poorest populations more severely.

In response, Brazil is actively engaging in the transition to a low-carbon economy. At COP28, in Dubai, Finance Minister Fernando Haddad has launched the Brazilian Ecological Transformation Plan (ETP). This Plan seeks to shift economic, technological and cultural paradigms towards sustainable development based on sustainable relationships with nature and its biomes. To achieve this, strong public and private investment – in sustainable infrastructure, clean technologies, and new production models – will be paramount.

However, achieving this ambition comes with significant challenges, particularly in maintaining external competitiveness. As it moves towards a greener economy, Brazil must ensure that its policies and investments do not compromise the competitiveness of its products in global markets, or create macroeconomic imbalances that could jeopardize the sustainability of these efforts.

In partnership with the Ministry of Finance, and in cooperation with CEPAL and IPEA, AFD is developing a GEMMES economic modelling tool to test policy instruments capable of promoting a just and green transition. 

The GEMMES Brazil model will serve to evaluate the impact of public policies, specifically the ones on the Ecological Transformation Plan, with a special focus on their long-term consequences for economic growth, employment, macroeconomic stability, and climate/environmental variables. Indeed, for a successful green transition, Brazil needs comprehensive and coordinated policies that not only cut emissions but also support socioeconomic development, protect the environment, and ensure macroeconomic stability. 

GEMMES is an empirical structural macroeconomic model capable of identifying the specific dynamics of open developing countries. The model is built in partnership with local authorities and research institutes to guarantee that the tool is coherent with the country's needs and to assure that the partners are capable of using and improving independently. It is a monetary model that allows policymakers to test different policy instruments and identify the financial mechanisms and the consequences of these policies in different contexts. 

After developing a preliminary model calibrated with Brazilian data, the project team will refine the tool by incorporating the specific characteristics of Brazil’s sectoral, macroeconomic and financial framework: 

• The model needs to account for the dynamics of interest and exchange rates and their impact on private investment and employment, as well as the fiscal and macro-financial constraints and the capacity of public investments in green infrastructure to drive a new ecological transformation plan.
• The model will also bring a sectoral approach to provide detailed estimates of the impact of climate measures and sectoral policies in the medium- and long-run, considering different domestic and international scenarios, as well as their capacity to strengthen strategic productive chains and promote structural change towards an economy less dependent on natural-resource exploitation.

The project will result in a tool that models the macro-financial framework of the Brazilian economy, clearly identifying the mechanisms that determine interest rates and exchange rate dynamics, along with their impact on real variables (such as private sectoral investment decisions, exports, imports and market structure).

Throughout the project, the research team will organize workshops to ensure that the model responds to the specific needs of the Ministry of Finance, and training sessions will take place so that public policy analysts can use the model effectively to evaluate policy measures. Several publications, including one final book, are also expected.

Since achieving peace in the early 1990s, Cambodia has undergone rapid economic growth driven by the garment, tourism, and construction sectors. The country is expected to graduate from least developed country status by 2030. This shift from agriculture to manufacturing has led not to more jobs, but to different ones, increasingly formal and urban, contributing to poverty reduction, while also deepening Cambodia’s dependence on fossil fuels and imported electricity.

To sustain growth while pursuing its climate ambitions, the Royal Government of Cambodia has outlined clear strategies for a low-carbon transition. This transformation, however, also brings new macroeconomic and fiscal challenges, against the backdrop of rising energy demand, external trade vulnerabilities, and pressures on public finances. Understanding these challenges and how they interact is essential to design a feasible and financially viable strategy for the energy transition.

The ESTEEM Cambodia project supports the Cambodian government in preparing a feasible and financially viable strategy for the country’s energy transition. Through macro-economic modelling activities, it aims to:

1. Identify macroeconomic risks that could arise during the shift to cleaner energy, such as on public debt, employment, income inequality and monetary stability.
2. Explore how different energy scenarios interact with the overall economy.

To achieve this, research teams based in Paris and in Phnom Penh are designing a macroeconomic model tailored to Cambodia’s economy. They are working closely with key ministries to make sure the model becomes an effective tool for strategic planning.  This will help policymakers, especially the Ministry of Economy and Finance, make informed decisions and design a long-term strategy towards carbon neutrality.

The ESTEEM Cambodia project marks the second phase of a collaboration between the Royal Government of Cambodia and AFD. It builds on the results of a first phase, which created a user-friendly energy model called CEPIA, designed for the Cambodian energy sector. Developed with iED Consult for the Ministry of Mines and Energy, CEPIA produced four energy scenarios based on the Royal Government’s development and climate action plans. 

In phase 2, CEPIA will be linked to the ESTEEM model, in order to study the macroeconomic impacts of the four energy scenarios and connect them with broader socio-economic goals (GDP growth, investment, job creation…).

The project is carried out jointly by AFD researchers, Université Grenoble Alpes, and iED Consult, in close collaboration with the Ministry of Economy and Finance. Key members from various local ministries are actively involved in the development of the model, as well as in workshops and training activities, helping to build local expertise in macroeconomic modelling.

The project will result in:

• An ESTEEM macroeconomic model adapted to Cambodia, incorporating the energy scenarios from the CEPIA model developed during Phase I.
• A set of simulations analyzing the macroeconomic implications of Cambodia’s four energy transition scenarios.
• An interactive tool that can be used by government officials to simulate different scenarios and policies, particularly related to the energy transition.

Download the brochure

• Guilherme MAGACHO, AFD
• Isabelle FERAUDO, Université Grenoble Alpes
• Gaëlle LE TREUT, AFD
• Seav Er HUY, AFD Phnom Penh
• Somalyneth SARBOEUN, AFD Phnom Penh