Soft linking the Italian energy and economic systems

Abstract

Decarbonization focused on Greenhouse Gases (GHG) emissions reduction necessitates energy transition from fossil fuels to green and renewable energy sources. In this respect, it is important to analyze the impact of this transition on a broader economic system. This paper is focused on the economic impact of decarbonization, based on an enhanced Linked Hybrid Model (LHM), where a General Equilibrium Model for Economy Energy Environment in Italy (GEM-E3-ITA) is soft linked with The Integrated Markal Efom System energy model of “Ricerca sul Sistema Energetico” (TIMES-RSE). The model is an advanced global, five-region, multi-sector, dynamic recursive system driven by the accumulation of capital and equipment. The model enhanced with additional features including the explicit integration of the biomethane sector, decarbonization trends in the rest of the world under three variants, and the main channels of financing requirements. The soft link is performed on a rich database, where detailed energy information is combined with global macroeconomic data. Particular attention is paid to the energy-intensive industries, green technologies and energy sectors to ensure that demand mirrors adequately supply through the soft-link. Results, differentiating the impact of decarbonization in terms of financing costs, suggest that while transition pathways are effective in reducing GHG emissions, a temporary slowdown in economic activity is likely, particularly in the short and medium terms. This is especially evident under high-cost financing schemes. The paper concludes that market-based financial mechanisms with fair and inclusive energy transition principles, have the potential to stimulate economically and socially sustainable decarbonization.