Global energy transition pathways and structural change: a calibrated Stock-Flow Consistent Input-Output model of the world economy

The energy transition that the global economy must undertake to achieve climate goals entails significant structural change within the economic system. The electrification of production processes implies the substitution of fossil fuels with electricity as intermediate inputs for industries. Similarly, the electrification of buildings and transportation systems requires households to reduce fossil fuel consumption in exchange for electricity. Consequently, electricity demand surges---and must increasingly be met by renewable sources. As a result, green utilities expand their production and investments, whereas brown utilities and fossil fuel producers shrink and divest. These developments impact supply chains in expansionary and contractionary ways, respectively, with the net effect feeding back into the economy by influencing aggregate consumption and investment. The thesis develops a Stock-Flow Consistent Input-Output dynamic macroeconomic model of the world economy to analyse these complex dynamics and provides methodological contributions to the literature. In addition to households, a bank, a government, and a central bank, the model includes a production network comprising 27 industries and 18 products, differentiating between key mining, manufacturing, and service sectors, as well as several green and brown utilities. The model is extensively calibrated: household and government consumption baskets' compositions and greenhouse gas emission intensities, as well as each industry's specific technical coefficients, output-capital ratios, depreciation rates, labor productivity, wage rate, pricing markup, and emission intensity have been derived from real-world data. It is the first model of its kind in which each industry invests in several distinct capital goods based on sector- and asset-specific requirements. A robust calibration of industries' production technologies and the technical change associated with the electrification process has been achieved by targeting real---rather than monetary---relationships, as captured by technical coefficients and output-capital ratios. An innovative method has also been proposed for incorporating perfect substitutability between green and brown electricity---with grid priority for the former---within an input-output framework. Three energy transition pathways envisioned by the International Energy Agency (IEA) are simulated by modeling two key processes: (i) the rising share of electricity generated by green utilities and (ii) the electrification of production processes and household consumption. For each energy transition scenario, these two processes are calibrated in detail from IEA data. The resulting endogenous dynamics yield several key insights. In the short to medium term, the net effect of the above-mentioned expansionary and contractionary forces is to boost GDP growth and employment. The relative importance of industries producing capital goods and metals increases. Moreover, the dual transition process---rising green share and electrification---results in a change in relative prices. The transportation sector experiences the strongest price growth due to its massive electrification effort. Overall, the energy transition is found to be inflationary. Greenhouse gas emissions in each scenario are significantly larger than those reported in the standard literature, due to the expansionary effects on economic activity caused by the transition. Finally, results indicate that electricity production significantly exceeds IEA's projections, which may underestimate demand due to their framework's lack of an endogenous GDP dynamic and an input-output production structure.