Systems Thinking for a People-centered Transition to a Low-carbon Economy

The COP29 climate summit at Baku ended with a disappointing outcome on climate finance. Even after three decades of international negotiations on climate change, progress has been slow. Why is it so hard for countries to agree on climate action?

Climate negotiations are complex because climate policies affect not only the environment but also the economy and livelihoods. For instance, transitioning from fossil fuels to renewable energy may reduce emissions in the power sector. However, it could also affect workers in fossil-fuel-dependent industries. Will the current industrial workforce be able to acquire the skills to operate low-carbon technologies? How will this transition impact women and their participation in the workforce? Furthermore, how would these changes impact the affordability of electricity for low-income households?

Such interdependencies make it important for policymakers to have a holistic understanding of how climate policies impact people and the planet. Systems thinking is an approach that enables this. It allows policymakers to assess such interactions and foresee unintended consequences by looking at the bigger picture, rather than seeing parts in isolation.

Systems thinking uses visual tools to “map” the connections within a system. One such mapping tool is a causal loop diagram, which can visually show how changes in one area, like climate policy, can translate to other related areas of the economy and society.

For example, a country’s wealth is conventionally measured by its gross domestic product (GDP). It represents the difference between the income earned by households and the taxes paid to the government. This tax revenue, in turn, can be reinvested by the government in the economy, boosting GDP growth and capital formation. The income earned by households is determined by their skills and wage rates. The economy also has private investments in addition to government investments. This is a basic model of the economy represented by the causal loop diagram above.

Now, let’s consider what happens to the economy once climate policies take effect. A shift from a “brown” (fossil-based) economy to a “green” (low-carbon) economy will likely lead to structural changes including changes to jobs, resources, investments and skill demands. For example, producing more electricity from renewables will require employing more people to set up solar and wind power projects.

Similarly, transitioning from internal combustion engine vehicles to electric vehicles will require more people in specialized manufacturing. Electric vehicles need fewer, almost one tenth of the parts needed by petrol and diesel cars. But these components are more specialized. This means that only a portion of the current workforce – those with the requisite skills – will find employment in the EV manufacturing processes. This structural shift prompts a question – should car manufacturers lay off their current workforce in favor of those with the requisite skills or invest in reskilling their existing workers? Such shifts will also occur in hard-to-abate industrial sectors such as steel and cement as they move to low-emission technologies and processes.

As the green sectors in the economy expand, the brown sectors will shrink. While jobs in the fossil fuel sectors will be lost, new opportunities will emerge in cleaner sectors. The skills needed, the wages workers are paid and the type of work they do will also change. Will these transitions create enough new green jobs? What skills would people need to learn today to work in the new green jobs of tomorrow?

One way to incentivize industry to adopt cleaner fuels and technologies is to introduce a carbon tax that makes fossil fuels relatively expensive. But in the short term, this could raise energy prices for households that rely on fossil fuels, creating an unequal burden for lower-income households. We can see this link if we expand the causal loop diagram of the economy to the energy sector and add a carbon tax.

This elucidates how policy interventions that don’t analyze related consequences can deepen inequity. The shifts to a low-carbon economy will need several additional policy interventions that enable a just and equitable transition. Their impacts will need to be balanced through policies that compensate vulnerable groups and households that could be disproportionately affected.

Finally, the causal loop diagram shows how climate policies and a greener world need not come at the cost of development. Investments in green jobs and skills can add to the economy and strengthen the GDP, provided workers who stand to lose their jobs due to the transition are protected.

Using systems thinking, to identify the opportunities and plan for the risks, can help strengthen political and public support for climate action. Integrating systems thinking into climate policy planning can help ensure that environmental, economic and social goals align for a greener planet and a prosperous future for all.

Click here to explore a systems dynamics model of the Indian economy.
Click here to read our research about the macroeconomic impacts of decarbonization in India.
Click here to learn about the green economy model for India.