DIAMOND project deliverable 4.5 Financial and Labour Markets and Consumers in IAMs

Process Integrated Assessment Models (IAMs) have been central to mapping cost-effective decarbonization pathways, but they typically assume frictionless labour and capital markets and represent technology adoption as cost-driven optimisation by representative agents. These simplifications conceal exactly the frictions that determine how fast, how fairly and at what cost the European green transition can be delivered. DIAMOND deliverable D4.5 takes a structured step beyond these limits. Building on an extensive literature review, complemented by a stakeholder-informed agenda, the report introduces heterogeneity on the supply and demand sides of labour, financial and consumer technology markets and endogenises the matching processes that connect them. Three underlying working papers operationalised this agenda in established IAMs. A directed search-and-matching module reinterprets the CET labour-allocation elasticity as the equilibrium outcome of search frictions, wage bargaining and worker sorting, and is integrated with GEMINI-E3. A financial market module replaces uniform discount rates with technology- and country-specific Weighted Average Costs of Capital in CLEWs-EU and embeds a module in which these WACCs evolve endogenously with financial maturity in NEMESIS. A heterogeneous consumer diffusion module combines liquidity constraints, intertemporal household choice and social-network learning, and is coupled with GCAM-Europe. Together the extensions render unemployment and vacancy dynamics, capital availablity and risk premia and information and affordability thresholds visible inside IAMs, and so enlarge the policy space from carbon pricing  and production subsidies to combinations of training and mobility support, green financial regulation, preferential lending, green QE, information interventions and targeted adoption subsidies.

DIAMOND project deliverable 4.5 is available here.