Energy transition and structural change: a calibrated Stock-Flow Consistent Input-Output model

The energy transition involves substantial structural changes in the economy. Green utilities increase their production and investments, while brown utilities and fossil fuel producers decline. These developments impact supply chains in expansionary and contractionary ways, respectively, with the net effect feeding back into the economy by a↵ecting aggregate consumption and investment. We have developed a Stock-Flow Consistent Input-Output macroeconomic model of the world economy to analyse these dynamics. It includes a production network comprising 27 industries, differentiating between key mining, manufacturing, service, and both green and brown electricity sectors. It is the first model of its kind to have each industry invest in distinct capital goods based on sector- and asset-specific requirements. All parameters related to production technologies capture physical relationships and are derived from real-world data. We have simulated three energy transition pathways envisioned by the International Energy Agency (IEA) by modeling two parallel processes: (i) the increasing share of total electricity generated by green utilities and (ii) the electrification of production techniques and household consumption. The resulting 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. The relative importance of industries supplying machinery and metals increases. The electrification of transportation services raises their cost, which, in turn, a↵ects other prices and generates inflation. Finally, we find that electricity production significantly exceeds IEA’s projections, which may underestimate demand due to their framework’s absence of an input-output production structure.