IEA (2022), Global Energy and Climate Model, IEA, Paris https://www.iea.org/reports/global-energy-and-climate-model, License: CC BY 4.0
The Global Energy and Climate Model (GEC Model) uses macro drivers, techno-economic inputs and policies as input data to design and calculate the scenarios. The values for the different data categories and scenarios used in the GEC Model 2022 can be downloaded here.
Economic activity and population are the two fundamental drivers of demand for energy services in GEC Model scenarios. Unless otherwise specified, these are kept constant across all scenarios as a means of providing a starting point for the analysis and facilitating the interpretation of the results.
The projections are based on the average retail prices of each fuel used in final uses, power generation and other transformation sectors. These end-use prices are derived from projected international prices of fossil fuels and subsidy/tax levels and vary by country.
We use the medium variant of the United Nations projections as the basis for our population growth. In this variant, global population growth slows over the coming decades, but the total population nonetheless rises from 7.8 billion today to more than 9.6 billion in 2050.
More than half of the increase in the global population to 2050 is in Africa, underlining the importance of this continent to the achievement of the world’s sustainable development goals. India accounts for almost 15% of the growth and becomes the world’s most populous country in the near term as China’s population growth stalls.
The share of the global population living in cities and towns is assumed to rise to 68% in 2050 from 57% today. The addition of 75 million people on average each year to the urban population, predominantly in developing economies, means that urban public policies, design and infrastructure choices become crucial variables in the future of global energy. The coastal location of many of the world’s largest cities also puts them in the front line when it comes to the impacts of a changing climate.
The future rate of global population growth slows notably compared with the recent past, due in large part to falling global fertility rates as average incomes rise.
In GEC Model 2022 scenarios, the global economy is assumed to grow on average by nearly 3% per year – over the period to the middle of the century. This growth is primarily driven by emerging market and developing economies. Over the near term, the growth trajectory includes the impact of Russia’s invasion of Ukraine and rising inflation.
There are, however, downside risks for the outlook to 2030 resulting from higher interest rates, a mood of insecurity holding back investment decisions and spending on household durables, and uncertainty as to whether macroeconomic authorities are able to contain inflation and avoid a price-wage spiral. The assumed rates of economic growth are held constant across the scenarios, which allows for a comparison of the effects of different energy and climate choices against a common backdrop.
International prices for coal, natural gas and oil in the GEC Model reflect the price levels that are needed to stimulate sufficient investment in supply to meet projected demand. They are one of the fundamental drivers for determining fossil fuel demand and supply projections in all sectors and are derived through iterative modelling.
The supply modules calculate the production of coal, natural gas and oil that is stimulated under a given price trajectory, taking into account the costs of various supply options and the constraints on resources and production rates. If prices are too low to encourage sufficient production to cover global demand, the price level is increased and energy demand is recalculated. The new demand resulting from this iterative process is again fed back into the supply modules until a balance between demand and supply is reached for each projected year.
The price trajectories do not attempt to represent the fluctuations and price cycles that characterise commodity markets in practice. The potential for volatility is ever present, especially in systems that are undergoing a necessary and profound transformation.
CO2 price assumptions are one of the key inputs into the GEC Model as the pricing of CO2 emissions affects demand for energy by altering the relative costs of using different fuels.
An increasing range and variety of carbon pricing schemes are coming into operation around the world. There are 68 direct carbon pricing instruments existing today, covering more than 40 countries. Global carbon pricing revenue in 2021 increased by almost 60% from 2020 levels, to around USD 84 billion.
The STEPS includes only existing and announced initiatives, whereas in the APS and NZE additional measures of varying stringency and scope are assumed to be introduced. In the NZE, for example, carbon prices are in place in all regions, rising by 2050 to an average of USD 250/tonne CO2 in advanced economies, to USD 200/tonne CO2 in emerging market and developing economies with net zero emissions pledges, and to lower levels elsewhere. As with other policy measures, CO2 prices need to be introduced carefully, with a view to the likely consequences and distributional impacts.
For fuel end-use prices, for each sector and GEC Model region, a representative price (usually a weighted average) is derived taking into account the product mix in final consumption and differences between countries. International price assumptions are then applied to derive average pre-tax prices for coal, oil, and gas over the projection period which are used in the model for the technology choice. Excise taxes, value added tax rates and subsidies are taken into account in calculating average post-tax prices for all fuels. In all cases, the excise taxes and value added tax rates on fuels are assumed to remain unchanged over the projection period. Governmental actions to shield consumers are also taken into account.
We assume that energy-related consumption subsidies are gradually reduced over the projection period, though at varying rates across the GEC Model regions and the scenarios. In the Announced Pledges Scenario the oil price is lower than in the Stated Policies Scenario. In order to counteract a rebound effect in the transport sector from lower gasoline and diesel prices, a CO2 tax is introduced in the form of an increase of fuel duty to keep end-user prices at the same level as in the Stated Policies Scenario. All prices are expressed in US dollars per tonne of oil equivalent and assume no change in exchange rates.
For electricity end-use prices, the model calculates prices as a sum of the wholesale electricity price, system operation costs, transmission & distribution costs, other supply costs, and taxes and subsidies.
There is no single definition of wholesale electricity prices, but in the GEC Model the wholesale price refers to the average price paid to generators for their output. For each region, wholesale electricity price are derived under the assumption that all plants operating in a given year recover the full costs – fixed costs as well as variable costs – of electricity generation and storage. The key region specific factors affecting wholesale prices are therefore:
- The upfront capital investment and financing costs of electricity generation and storage plants;
- The operation and maintenance costs of electricity generation and storage plants; and
- The variable costs of coal, natural gas, oil and other fuels inputs and, if applicable, CO2 cost of generation plants’ output.
System operation costs are taken from external studies and are increased in the presence of variable renewables in line with the results of these studies. Transmission and distribution tariffs are estimated based on a regulated rate of return on assets, asset depreciation and operating costs. Other supply costs - including retail costs - are estimated from historic data. Taxes and subsidies by end-use sector are also taken from the most recent historic data, with subsidy phase-out assumptions incorporated over the projection period in line with the relevant assumptions for each scenario.
The IEA measures fossil fuel consumption subsidies using a price-gap approach. This compares final end-user prices with reference prices, which correspond to the full cost of supply, or, where appropriate, the international market price, adjusted for the costs of transportation and distribution. The estimates cover subsidies to fossil fuels consumed by end-users and subsidies to fossil-fuel inputs to electricity generation.
The price-gap approach is designed to capture the net effect of all subsidies that reduce final prices below those that would prevail in a competitive market. However, estimates produced using the price-gap approach do not capture all types of interventions known to exist. They, therefore, tend to be understated as a basis for assessing the impact of subsidies on economic efficiency and trade. Despite these limitations, the price-gap approach is a valuable tool for estimating subsidies and for undertaking comparative analysis of subsidy levels across countries to support policy development.