# **1. Introduction and objective**

In their pursuit of a sustainable future, and given the urgent need to address climate change, countries worldwide are actively pursuing decarbonization strategies (United Nations, 2015). These strategies require the formulation of policies that facilitate the reduction of carbon emissions in the day-to-day operations of an economy, including in the power sector. An effective policy must take into consideration economic incentives but should also consider the complex dynamics by which low-carbon technologies are adopted to meet increasing power demand.

Data-rich high-income countries often have access to analytical tools to evaluate low-carbon policies and their implications for emission reductions, energy uses, government budgets, and overall macroeconomic impacts. However, many developing countries face significant hurdles, due in part to limited data availability. While the World Bank’s MFMod (Burns et al, 2019) and MANAGE (Beyene et al, 2023) models lend themselves to analyzing the economic incentives and consequences of climate change policies, they lack features related to how the diffusion of new technologies might endogenously affect the cost and therefore uptake of different technologies.

This paper introduces FTT-FLEX, a model designed to bridge that gap in a developing country context. Applied to the power sector, FTT-FLEX can be used to help design policies to decarbonize the power sector in a small open economy context. FTT-FLEX can also be used in smaller high-income countries whose actions are sufficiently small on a global scale as not to affect global prices significantly.

# **2. The FTT-FLEX model**

FTT-FLEX is a simplification of on an already established global modeling framework of technology diffusion called Future Technology Transformation-FTT (Mercure, 2012). The framework is applicable to the supply of different goods for which there is a menu of technologies including energy, transport, steel, or heating (Mercure, 2012; Mercure et al., 2014; Mercure et al., 2018; Knobloch et al., 2018, Vercoulen et al., 2018).

This paper focuses on the application of FTT-FLEX in the supply of electrical power. However, the approach laid out can be extended to the choice of technology in other sectors as well. FTT-FLEX reduces the data requirements of the global FTT model, allowing it to be used in countries with limited data. It focusses on the process embedded in the Global FTT model by which small developing economies adopt and diffuse power generation technologies available at the global level but incorporates the impact that external decisions might have on the global technology-cost frontier faced by the smaller economy.

In FTT, the technology diffusion process of a given technology depends both on its cost structure and the extent to which it is already used (its share in total generation capacity) both at the global and local level. Technology cost is assumed to be a declining function of global cumulative past investments in the technology. Experience with a new technology, proxied by its share in total output, constitutes a global knowledge externality. As the world installs more capacity in emergent technologies the cost of these technologies for new investors comes down. In FTT-FLEX, the reduction in costs from the diffusion and installation of technologies in the rest of the world are an exogenous input. Nevertheless, domestic diffusion is affected (as in the larger FTT model) by the extent to which different technologies are used in the domestic economy.

2