Enhancing the quality of climate policy analysis in China: Linking bottom-up and top-down models

Abstract

Macroeconomic models are the most common analytical tools to assess economy-wide impacts of climate change policies. These models are, however, not capable of representing detailed physical characteristics of energy production and combustion technologies and often lead to the overestimation of economic impacts. One solution to address this problem is to link top-down macroeconomic models with bottom-up energy sector models that can represent technological details. This study develops a hybrid model by linking a top-down computable general equilibrium model with a bottom-up energy sector model and implements it to assesses economic impacts of emission reduction targets in China set under the Paris Climate Agreement. Results show that economic impacts assessed by the hybrid model are nearly three times smaller than that assessed by the top-down model alone.