Closing models, opening debates: theoretical uncertainty and the low-carbon transition

This study addresses a critical oversight in the Energy-Economy-Environment (E3) modeling landscape, where standard neoclassical assumptions-such as the causal primacy of savings over investment-have been taken as foundational. While the broader Computable General Equilibrium (CGE) field has rigorously examined the impact of "closure" choices on model outcomes, this issue has yet to be meaningfully integrated into E3 modeling, which is surprising given its implications for decarbonization policy. By constructing a stylized KLEM (Capital-Labour-Energy-Material) model and varying closure assumptions across pollution reduction targets, this work illustrates how E3 outcomes are highly contingent on model closure. These results suggest that the prevalent reliance on conventional neoclassical assumptions may produce an overly uniform view of decarbonization pathways, obscuring the potential diversity of policy effects. The study advocates for a systematic re-evaluation of closure options in E3 modeling to more accurately represent the complexity of the transition.