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)

Elaborating development policies in line with the principles of strong sustainability is a complex issue because of the tensions that may exist between different Sustainable Development Goals. The desire to integrate 42% of renewable energies in Côte d'Ivoire's energy mix by 2030 therefore requires a reflection on the possible sustainable development trajectories, a subject at the heart of the GEMMES Côte d'Ivoire project.

This project is part of AFD's modelling work, that integrates climate dynamics, both adaptation and mitigation, into macroeconomic forecasts to inform public policy choices in this area. AFD is developing a general theoretical model on the one hand, and national models applied to specific cases and adapted to the characteristics of each country (including the GEMMES Côte d'Ivoire model) on the other hand. 

This collaboration between AFD, the Ministry of Planning and Development of Côte d'Ivoire and Mines ParisTech is one of the components of the memorandum of strategic dialogue, which aims to develop research activities, their dissemination, as well as their synergies with public policies.

GEMMES Côte d'Ivoire's first goal is to better understand the interactions between the economy and socio-economical aspects. It focuses on the macroeconomic impacts of the energy transition and their ability to create favorable conditions for poverty reduction.

One of its specificities is that it aims to foster dialogue on the ecological transition between researchers and policy makers, both at national and international levels. GEMMES Côte d'Ivoire aspires to propose a tool to facilitate political decision-making, proposing transition trajectories in favor of climate. It could then provide elements contributing to the definition of an energy transition strategy for 2050 in line with Côte d'Ivoire’s poverty reduction and climate goals.

More broadly, GEMMES Côte d'Ivoire is helping to consolidate AFD’s position as a main stakeholder on low-carbon transition and strong sustainability.

GEMMES Côte d'Ivoire develops a multidimensional and transdisciplinary approach focused on the effects of the energy transition. The project is based on modelling exercises:

• Techno-economical modelling of the energy system, developed by Mines Paris Tech
• Macroeconomic modelling, developed by AFD and the Ivorian think tank CAPEC

The methodological framework of GEMMES has been adapted to meet the characteristics of the Ivorian economy. A particular focus was placed on the stability of the trade balance and public debt. Moreover, the coupling between the energy model and the macroeconomic model allows to perceive the interactions between the dynamics of energy transition and macro-financial stability. In addition, coupling can highlight the benefits of an ambitious energy transition in terms of external sustainability and job creation.

Three scenarios quantifying the long-term macroeconomic effects of the energy transition have been established. As a result, the development of renewable energy could reduce the average production cost by 20% under certain scenarios, notably through increased investment in the solar battery sector.

The development of this sector would also generate positive socio-economic impacts, concerning growth, employment and the trade balance, while increasing bioelectricity generation capacity improves the income of 4 million people in rural areas. This environment is then more favourable to the deployment of specific policies to fight poverty.

• Read also: Assoumou, E., & McIsaac, F. (2022). Côte d'Ivoire's electricity challenge in 2050: Reconciling economic development and climate commitments. Energy Policy, 160, 112681

The project has conducted the first GEMMES modelization exercise incorporated in the ongoing public policy dialogue between AFD and Ivorian public stakeholders. The project has provided the Ivorian government with models highlighting the opportunities and contradictions within the country's trajectory, between the possible energy choices, the environmental agreements to be considered and the financial implications of each scenario.

Interactions between socio-economic and ecological spheres make the elaboration of strong sustainability development trajectories a particularly difficult exercise. Morocco expressed its willingness to embark on a development plan based on prosperity, inclusion and sustainability in a report published in May 2021, but the country is facing one of the highest water stress conditions in the world. A technical cooperation request concerning the modelling of the impact of climate change on agriculture by 2050 was therefore sent to AFD, which the GEMMES Morocco model is attempting to satisfy.

This project is part of the modelling research 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 macroeconomic model on the one hand, and on the other hand national models applied to concrete cases and adapted to the characteristics of each country, including the GEMMES Morocco model. 

This partnership is carried out in the context of the memorandum of strategic dialogue between AFD and the Directorate of Studies and Financial Forecasts (DEPF) of the Ministry of Economy and Finance of the Kingdom of Morocco. The research program is financed by the 2050 Facility, which aims to contribute to capacity building and the development of long-term strategies in line with the commitments of the Paris Agreement. In addition to the partnership with the DEPF, the project is developed with the Mediterranean Institute of Marine and Terrestrial Biodiversity and Ecology for the hydro-agricultural part.

The GEMMES Morocco project carries out simulations of agricultural production and available surface water resources for the year 2050 according to different climate scenarios, and analyses the impacts on the country's economy. This approach is rooted in the will to inform public decision-making, through the collaboration between Moroccan, French and international experts. The GEMMES Morocco model is intended to be an additional simulation tool for the Directorate of Financial Studies and Forecasting.

The specificity of this project lies in the coupling of two models: the macroeconomic model GEMMES, adapted to the specificities of Morocco, and the hydro-agricultural model Lund-PotsdamJena managed Land (LPJmL). The latter, widely used in the international scientific community, produces simulations of the country’s most important surface hydrology and crop yields. It uses projections of temperature and precipitation from the ALADIN regional climate model and compares the water requirements for Moroccan agriculture to the resources that will actually be available. The GEMMES Morocco model then uses these agricultural yield projections to integrate them into its macroeconomic framework.

Preliminary results were presented at COP26 in Glasgow in 2021, along with a summary for policy makers. The initial findings highlight the adverse effects of climate change, particularly on the water resources available for irrigation. In 2050, an irrigation level corresponding to 75% of the needs would lead to an agricultural production 3.7% higher than if only 50% of the irrigation needs were covered. GDP and household consumption would then be 0.5% higher. Thus, investing in water infrastructure seems essential to limit the impacts of climate change. 

The GEMMES Morocco project reveals the usefulness of coupling two types of models responding to different areas of expertise. By encouraging dialogue between researchers from different disciplines, the different perceptions of each can be explained and thus lead to a greater relevance of the political debate.

The contributions of this project can also continue beyond the framework of AFD, either because of the integration of some of its results into a World Bank exercise or because of its use in the Moroccan long-term strategy.