WORKING PAPER 24-6 Macroeconomic implications of a transition to net zero emissions Approaches of and lessons from World Bank Group Country Climate and Development Reports, with an application to Turkey Stéphane Hallegatte, Florent McIsaac, Hasan Dudu, Charl Jooste, Camilla Knudsen, and Hans Beck March 2024 ABSTRACT In 2022 the World Bank Group launched a new core diagnostic tool: the Country Climate and Development Report (CCDR). Published for 42 economies so far, CCDRs use resilient and low-emission development scenarios to identify synergies and tradeoffs between development and climate objectives. There are several modeling challenges associated with the analysis of the macroeconomic consequences of these development pathways, including those related to the nonmarginal nature of the required transformation, the role of technologies, and the replacement of fossil fuel-based assets with greener ones. To address some of these challenges, several CCDRs have used a hybrid modeling approach that combines a set of sectoral analyses with macroeconomic models. Specifically, sectoral techno-economic models are employed to construct resilient and low-emission development trajectories in key sectors. The macroeconomic implications of these sectoral transitions are then assessed by linking the sectoral models with two macroeconomic frameworks: a multisector general equilibrium framework and an aggregate macrostructural model. This hybrid approach combines the advantages of multiple tools and captures the various dimensions of the transition, including the need to tackle multiple market failures, beyond the emissions externality; analyze price and nonprice policies and their interactions; represent explicitly the replacement of assets and infrastructure; assess the macroeconomic feasibility of the sectoral transitions and the required investments. This paper uses the case of Turkey to describe the methodological approach and summarizes the results of the CCDRs that have been published to date. Findings suggest that, despite large investment needs, the transition can 1750 Massachusetts Avenue, NW | Washington, DC 20036-1903 USA | +1.202.328.9000 | www.piie.com Stéphane Hallegatte is a senior climate change advisor of the World Bank. Florent McIsaac is a senior economist at the Macroeconomic Modelling Unit of the Macroeconomics, Trade and Investment Global Practice at the World Bank. Hasan Dudu is an economist at the Middle East and Central Asia Department of the International Monetary Fund. Camilla Knudsen is an economist at the World Bank. Charl Jooste is a senior economist at the Macroeconomic Modelling Unit of the Macroeconomics, Trade and Investment Global Practice at the World Bank. Hans Anand Beck is the program leader for Turkey in the World Bank Equitable Growth, Finance and Institutions Group. WP 24-6 | MARCH 2024 contribute positively to economic growth, especially when indirect mitigation benefits are taken into account, but only if structural challenges can be managed, climate and development policies are well designed, and negative impacts on some sectors or communities are mitigated. JEL Codes: E60, Q43, Q54 Keywords: Macroeconomic modeling; climate change; technological change Author’s Note: This paper—prepared for a conference on Macroeconomic Implications of Climate Action on June 5-6, 2023, at the Peterson Institute for International Economics (PIIE)—is an extension of the methodological paper focused on Turkey, available as Stephane Hallegatte, Florent McIsaac, Hasan Dudu, Charl Jooste, Camilla Knudsen, and Hans Beck, 2023, The Macroeconomic Implications of a Transition to Zero Net Emissions: A Modeling Framework, Policy Research Working Paper 10367, Washington: World Bank Group. This work is part of the analytical work for the World Bank Country Climate and Development Report (CCDR) for Turkey and benefited from the contributions of the entire CCDR team, especially the many colleagues who developed the sectoral roadmaps on which this work is based. The authors thank in particular the peer reviewers of the CCDR, including dozen of World Bank staff, Nick Stern and Amar Bhattacharya, who provided insightful comments at various stage of this work. We also thank Etienne Espagne, Jean Pisani-Ferry, Dilek Sevinc, and Marc Noland for their helpful comments on this manuscript; Ioana Marinescu and Stefano Scarpetta for their detailed and constructive discussion notes; and all participants of the PIIE conferenc