(CGE) ENVISAGE model of the Center for Global Trade Analysis (GTAP) at Purdue University and the World Bank.<sup>1</sup> The macroeconomic model is linked with the fossil fuel depletion models from Rystad (oil and gas) and Wood Mackenzie (coal).

# **2.2. Climate Clubs**

For this study, ENVISAGE’s 141 countries and regions were aggregated into 15 regions, further grouped into two stylized and hypothetical climate policy “clubs,” the members of which are assumed to apply similar policies:

- _Low Carbon-Transition (LCT) pioneers_ , which are assumed to be the first movers of climate policies. They include almost all member countries of the Organisation for Economic Cooperation and Development (OECD) and several middle-income net importers of fossil fuels, most notably China and India. LCT Pioneers have a revealed comparative advantage in low-carbon, knowledge-intensive sectors, even if they are large producers of fossil fuels (such as Canada, Norway, Australia, the United Kingdom, or the United States).

- _Fossil Fuel–Dependent Countries (FFDCs)_ , which can cope with an LCT through various diversification and cooperation choices. FFDCs are divided into five subgroups with distinct patterns of fuel dependency and income levels: (i) Gulf Cooperation Countries; (ii) other large middle-income oil and gas exporters; (iii) Russian Federation;  (iv) low- and middleincome countries with large discovered, but not yet fully exploited reserves; and (v) middleincome coal exporters (Indonesia, Mongolia, South Africa, Colombia).

The assignment of countries to a category (LCT pioneers or FFDCs) is based on similarities in their fossil fuel–dependency structure, stage of industrialization and diversification, expected exposure to climate policy impacts, and income level, as well as observed pledges, strategies, and behavior (for example, level of ambition of their nationally determined contribution). Each country’s assignment to one of the two clubs also includes a subjective element—the judgment of the authors—and is not necessarily consistent with its ranking based on the index of preparedness for an LCT (Peszko et al 2020).

# **2.3. Scenarios**

The robustness of different diversification and climate policy strategies available to FFDCs is stress-tested by simulating multiple exploratory policy scenarios. These scenarios are designed as combinations of plausible (not necessarily probable) alternative external LCT impacts on FFDCs (over which they have little control) as well as the strategic choices that FFDCs can make to prepare for these impacts (figure 1):

- LCT Pioneers choices of climate policies (unilateral carbon taxes);

- LCT Pioneers choices of trade measures (border adjustment taxes);

- The FFDCs choices how to diversify their economies; and

- The FFDCs choices whether and how to cooperate on global climate action.

1 Recursive, dynamic CGE models are useful tools with which to understand both the relative scale of the shock and the subsequent economy—with adjustments of prices, wages, profits, outputs and trade flows. The recursive nature of the model simulates decision making under uncertainty and with myopic behavior of decision makers. For example, it allows for accumulation of vulnerable capital stock before the policy or technology shock occurs, even if some economic actors divest in response to preannounced or expected policies. Such models also have well-documented limitations.

5