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)

Public actors need to monitor the state of the environment in order to assess the effectiveness of their actions, prioritize policies and management measures, and thus objectively establish their contribution to the conservation of natural capital. To do so, they must be able to rely on scientific standards enabling them to define the thresholds from which environmental functions can be considered sustainable.

The ESGAP (Environmental Sustainability Gap) is an innovative tool that assesses the state of a territory’s environmental functions and their level of sustainability. For all critical components of natural capital in the territory concerned (air or water quality, pollution, forest resources, fisheries, etc.), this indicator calculates the difference between their current state and a state that would be sustainable (that is, a state compatible with a sustainable functioning of the processes necessary for the preservation of life, human activities and well-being). This allows the calculation of an “environmental sustainability gap”, which highlights the path that remains to reach the stage of environmental sustainability. This can then serve as a guide for public policy to estimate and preserve the natural state of a given territory.

Within the framework of the ECOPRONAT research program, AFD wishes to develop methodologies for assessing strong sustainability, that is to say adopting demanding criteria concerning the non-substitutability of natural capital by other forms of capital (physical and other) in a territory or country. AFD would also like to promote their use in international settings and contribute to the emerging international standards on the good ecological status of ecosystems.

 

This project aimed to test the relevance of the ESGAP framework in developing countries, where not all data on natural capital are always available. In collaboration with the United Nations Environment Programme (UNEP), Paul Ekins' team at University College London (UCL) supported two pilots of this indicator in Vietnam and Kenya.

These pilots were carried out by teams of experts both from national research institutes responsible for monitoring and reporting environmental data: the Kenya National Environmental Management Authority (NEMA) and the Institute of Strategy, Policy on Natural Resources and Environment (ISPONRE) in Vietnam. This work enables better integration of strong environmental sustainability principles into global environmental assessments.

These pilots also sought to better document the challenges of strong environmental sustainability in the series of Measuring Progress reports published by UNEP.

 

The ESGAP framework is based on a dashboard that provides information on changes in the functional state of 23 components of the environment, focusing on the differences between these changes and the objectives of maintaining or achieving “good ecological status”. These components cover the four main categories of critical and essential environmental functions: the provision of resources, the reprocessing of pollution, biodiversity and human health. The scores of the 23 components are then aggregated to form a synthetic indicator and a dynamic indicator. 

The two pilots revealed the general lack of standards for maintaining biodiversity in both countries, as well as significant gaps in environmental regulation, both in Kenya and Vietnam. The lack of historical reference points to measure the good state of the environment is a serious obstacle to the establishment of protection policies and prevents the debate on narratives and development trajectories respectful of the natural heritage.

Moreover, the analysis shows a worrying situation in both Kenya and Vietnam about pollution of natural environments, despite the very limited availability of data on these issues. In Kenya, the results are rather good on natural resources, but many essential and critical contributions of natural capital to human well-being and health are greatly degraded, both for water and air quality, as well as for access to natural amenities. In Vietnam, fish resources, soil erosion, and air and water pollution appear to be the most degraded dimensions.

According to ISPONRE and NEMA, the ESGAP framework has great potential as a tool for communicating the state of a territory and for monitoring public policies in both countries. It offers a framework for broadening the range of topics covered by public policies and proposes a high-quality standard for the establishment of environmental sustainability assessment frameworks.

This research project also supported a flagship UNEP report on the environmental content of the Sustainable Development Goals (SDGs), Measuring Progress: Environment and the SDGs, which incorporates the lessons learned from these two ESGAP pilots. This has shown that, of the 231 SDG monitoring indicators, 77 can be linked to an environmental theme from near or far, but that only 11 of them really describe the state of the environment.

Download the reports: 

• Environmental Sustainability in Kenya: A Case Study in the ESGAP and SESI (June 2022)
• Environmental Sustainability in Vietnam: A Case Study in the ESGAP and SESI (June 2022)

Initial feedback indicates that the ESGAP pilots need to be backed up by real capacity-building exercises of the administrations in charge of environmental monitoring and natural capital management, in order to hope to improve environmental diagnostics in the long term.

The concepts of “scientific standards” and “diagnosis of the state of natural capital contributions” also need to be refined, explained and adapted to the available contexts and data: if, ideally, these standards are derived from international frameworks and legitimated at the national level, often alternative indicators must be used to adapt the standards to different contexts.

These lessons complement those from a pilot of the ESGAP indicator, led by AFD and WWF in New Caledonia. Following another ECOPRONAT call for projects, two more ESGAP studies are underway:

• A first study aims to develop indicators for biodiversity and the health of natural ecosystems, as well as an ESGAP methodology in South Africa and Colombia.
• A second study aims to refine socio-economic indicators and study the relationship between the economy and the environment, with Vietnam as a case study.

Contact: 

• Oskar Lecuyer, research officer at AFD