How can we assess the macroeconomic and inequality impacts of Carbon Budgets?

In 2026, the UK government will decide on its Seventh Carbon Budget, covering the years 2038 to 2042. Policies recommended by the Climate Change Committee (CCC) require widespread social change, additional investment of around 1% of GDP, and major changes in practices and technologies within many industries (CCC, 2025). To successfully navigate such major changes, the Department for Energy Security and Net Zero (DESNZ) have identified macroeconomic and distributional analysis as evidence gaps they must address to set the Seventh Carbon Budget. In this Sprint we aim todevelop new modelling approaches to fill those evidence gaps. The models will assess macroeconomic impacts of carbon budgets, including the impact on people with different levels of income and wealth. Methods will be designed so as to be readily transferrable to other countries and regions.

Data-driven macroeconomic agent-based models have the characteristics required to model carbon budgets’ macroeconomic and inequality impacts. These models use real socioeconomic survey data to simulate the interactions of households, firms, government and the financial sector. This realism allows very specific policy interventions, in contrast to most macroeconomic climate modelling that flattens all policies into a carbon tax equivalent. This class of model is in its infancy but has already demonstrated the potential to rival the forecasting performance of DSGE* models (Poledna et al., 2023). Our team at INET Oxford has developed a prototype model that covers all OECD countries (Wiese et al., 2024). As the model outputs individual income and wealth balance sheets for each of the thousands or millions of agents represented in each time period, it has great potential to conduct dynamic analyses of the distributional impacts of policy over time.

* Dynamic Stochastic General Equilibrium models

Why this Sprint? Why now?

Partnering directly with DESNZ, we aim to provide provisional analysis in time to influence the 2026 Seventh Carbon Budget. This will enable macroeconomic and inequality goals to be taken into account when the government decides how emissions reductions are allocated between sectors of the economy, and how individual mitigation policies in the Carbon Budget Delivery Plan (DESNZ, 2023) are implemented.