A functionality can be served by a multitude of different technologies (characterized by different degrees of resource productivity), which determines economic activities. The economic analysis allows comparing the resources required to serve functionalities, and thus identify the most resource-efficient pathways. In economic terms this translates into different investment and operating costs as well as different sectoral demand structures.
For the economic evaluation of functionalities the interaction of stocks and flows is crucial (see above for a broader discussion on the importance of stock and flow interaction). We thus suggest applying the concept of user costs, since it captures both stock related costs (i.e. capital costs) as well as costs attributed to flows (i.e. operating costs). Annual user costs are the sum of annualized capital costs and annual operating costs and (at least should be) an important determinant for individual decision making. Hence for each functionality new (high-potential) technologies or fundamental behavioural change need to be identified and respective cost information needs to be gathered. The possible shifts from the set of currently used technologies (and the associated costs) to a set of new (breakthrough) technologies or behavioural patterns describe available transition processes. Both technologies and behavioural patterns affect economic structures.
The aggregate level is the second crucial one to be in the focus of analysis and consideration. In economic terms it is the macroeconomic perspective (i.e. capturing the macroeconomic effects of the transition) that is at the core of our interest at this level. Macroeconomic effects emerge via the interlinkages across different economic sectors and agents. For example, if there is increased demand for construction activities for the thermal improvement of the building stock, this generates increased demand for labour and other intermediate inputs in sectors that provide products which are needed for construction activities (e.g. insulation material, transport etc…). Also foreign trade may be affected by the transition if import intensities of products and technologies for transition options differ from those of conventional technology options. For example, if insulation material for buildings is over(under)proportionally imported, the foreign trade balance worsens (improves). Any acceleration of the diffusion of transition technologies is reflected in stronger macroeconomic effects. The macroeconomic evaluation needs to reveal the interrelationships between all economic sectors – and how these change through transition processes - within a macroeconomic consistent framework.
Compared to traditional modelling approaches ClimTrans2050 proposes an extended mindset for modelling that integrates the institutional layer more explicitly into the overall framework. The institutional layer in its comprehensive understanding determines the framing in which socio-economic activities take place, and thus shapes what form they take as well as it determines their GHG emissions. In the context of the functionality approach it ultimately co-determines the level of functionalities and which combinations of stocks and flows are chosen for satisfying them. The institutional layer is an enabling factor for functionalities and for transformation processes. In order to highlight the relevance of the different aspects of the institutional layer and particularly emphasizing the role of non-price mechanisms ClimTrans2050 proposes a separate tier to address the institutional setting. The rationale for this is to augment transparency with respect to instruments and mechanisms in modelling.
Giving special emphasis to the role and potentials of different institutions by deliberately distinguishing between the three tiers is one of the cornerstones of the ClimTrans2050 Research Plan. In a nutshell this approach has the following merits:
Institutional elements that are of high relevance in the context of long run decarbonisation processes comprise heterogeneous elements that encompass both market based and non-market based instruments and mechanisms: