Simulating Climate Futures: How IMF-ENV Supports Decarbonization Policy Design

IMF-ENV is a dynamic general equilibrium model developed by the IMF to assess the macroeconomic impacts of climate, energy, and trade policies across 160 countries and 76 sectors. It enables detailed simulation of policy scenarios, integrating emissions, fiscal dynamics, and sectoral transitions to support evidence-based green policymaking.

In April 2025, the International Monetary Fund introduced a major innovation in climate macroeconomics—IMF-ENV, a dynamic, multi-sectoral, general equilibrium model developed to assess the economic impacts of climate, energy, and trade policies. Created by Jean Chateau, Hugo Rojas-Romagosa, Sneha Thube, and Dominique van der Mensbrugghe, the model is a joint evolution of the World Bank’s ENVISAGE model and the OECD’s ENV-Linkages framework, with further input from Purdue University and aligned with methodologies used by the European Commission and the Network for Greening the Financial System (NGFS). IMF-ENV reflects the IMF’s growing focus on equipping countries with analytical tools to navigate the complexities of the green transition.

A Powerful, Granular Engine for Economic Simulation

IMF-ENV is a dynamic computable general equilibrium (CGE) model that integrates 160 countries and regions and 76 sectors. Its data foundation is the GTAP-Power database, which disaggregates energy generation into eight technologies and captures sector-specific greenhouse gas emissions, including carbon dioxide, methane, nitrous oxide, and fluorinated gases. This high level of detail allows the model to simulate not only macroeconomic variables such as GDP, investment, and trade flows, but also energy dynamics and emissions pathways. A standout feature is the model’s putty-clay capital structure, which separates new from old capital investments, allowing for realistic sectoral adjustment costs that are especially relevant when modeling energy transitions.

At the production level, firms minimize costs under perfectly competitive market conditions, using CES (constant elasticity of substitution) functions to substitute between labor, capital, energy, and intermediate inputs. Households are modeled as utility-maximizing agents with non-homothetic preferences, enabling the simulation of income-driven shifts in consumption. On the trade side, the model uses the Armington assumption to reflect product differentiation by country of origin, allowing for bilateral trade flow tracking and policy analysis such as tariff changes and carbon border adjustments.

Designing and Evaluating Climate Policy Packages

IMF-ENV was built with policy realism in mind. It can model a wide array of climate and energy interventions, from carbon pricing and emissions trading schemes to feed-in tariffs, green subsidies, and fossil fuel subsidy removals. Because it tracks emissions by gas, sector, and source, it enables targeted design of policy instruments across power generation, agriculture, transport, buildings, and industry. In the power sector, for example, it distinguishes among generation types—coal, gas, oil, nuclear, hydro, wind, solar, and others and models the impact of clean energy standards, feed-in tariffs, and cost incentives. Households’ energy demand can be modified to reflect shifts towards electric vehicles or heat pumps, with associated costs captured through investment adjustments.

For agriculture and land use, the model employs marginal abatement cost (MAC) curves to estimate emissions removals in sectors like forestry, since land-use change is not modeled in full general equilibrium. This approach enables the inclusion of climate benefits from reforestation or land restoration efforts even when detailed land transformation data are unavailable. The model also handles the fiscal side of climate policy, offering multiple revenue recycling options from labor tax reductions and public investment to direct transfers to households, capturing the political economy tradeoffs that typically accompany decarbonization strategies.

Policy-Relevant Baselines and Forward-Looking Scenarios

IMF-ENV’s baseline calibration incorporates real-world macroeconomic and energy projections from multiple sources. Historical GDP, current account, and fiscal data are drawn from the IMF’s World Economic Outlook, while future trajectories align with the Shared Socioeconomic Pathways (SSP2), and energy projections are taken from IRENA, PRIMES, POLES, and the NGFS transition scenarios. For emissions, national inventories and global scenario datasets are used to calibrate sector-specific intensities.

Although the model is not forward-looking in the intertemporal sense, agents are not assumed to optimize over time, this is a deliberate design choice. Recursive dynamics allow it to better reflect gradual policy implementation, political inertia, and technological uncertainty. Capital accumulation is modeled period by period, as is labor supply, which is endogenously responsive to changes in real wages. Energy efficiency gains are introduced autonomously across all sectors, capturing trends in technological improvement over time.

Applications, Visualizations, and What’s Next

The IMF developed an interactive dashboard using R-Shiny to help policymakers interpret the model’s complex outputs. The tool visualizes emissions trajectories, energy use, sectoral value-added, price dynamics, trade shifts, and fiscal impacts across countries and years. Standardized panels compare baseline projections with alternative policy scenarios. These visual aids have been central to applications in G20 countries, Middle Eastern fossil fuel exporters, and emerging markets undergoing Article IV consultations.

Looking forward, the IMF-ENV team plans to expand the model’s capabilities to include endogenous technological change (via R&D modules), split labor markets into skilled and unskilled categories, integrate outdoor air pollution and health co-benefits, and introduce a natural resource depletion module. This will enhance the model’s realism and usefulness, particularly for developing countries with limited fiscal space and growing exposure to climate risks.

In sum, IMF-ENV stands at the intersection of economic rigor and climate urgency. It is a foundational tool in the IMF’s effort to support member countries as they navigate the macroeconomic, structural, and distributional dimensions of climate action. With its capacity to simulate deep structural shifts and cross-border spillovers, IMF-ENV equips policymakers with the foresight and precision needed to steer toward a sustainable, low-carbon future.