Why We Should Use Simulation to Inform Policy Decisions in a Post-Pandemic Environment

Andrea Bassi, Abigail Schlageter

Geography: All Regions
Sector: Mobility

The COVID-19 pandemic has reinforced the urgency of investing in policy decisions that will mitigate the risk and scale of environmental and economic crises in the future. With many governments using infrastructure spending as a recovery tactic, policy makers need to prioritize sustainable and resilient projects.

Simulation offers data-driven and evidence-based forecasts of a project’s environmental, social, and economic outcomes. These forecasts are comprehensive: they include direct outcomes, such as direct project costs and job creation, as well as indirect and induced outcomes, such as indirect job creation, air emissions and water pollution, and resulting health impacts.

This level of detail and comprehensive analysis is essential for reducing the risk of poor financial performance, which is an important consideration for investors and policymakers. For example, in Canada, retrofitting a portion of existing buildings to improve energy efficiency and flood resilience is expected to generate long-term benefits in the form of job creation, avoided health costs, avoided flood damages, and emissions reductions. The results suggest that, by 2060, a return of more than CAD 18 for every CAD 1 initially invested can be expected.

Simulation has proven to be a valuable tool for identifying recovery strategies with the greatest economic, social, and environmental benefits. If recovery spending decisions are based on science-based simulation that cuts across policy domains, policy makers will be able to have a system-wide view of the potential benefits and costs of future projects. The result will be better economic returns and societal benefits, along with reduced environmental damage.

Informing policy decisions: simulation as a tool

While simulation has been used to inform policy changes and investment decisions in the past, it has rarely been used to give proper attention to the economic impact of environmental and social externalities, or systemic risks such as climate change.

For example, in the U.S., decisions on road infrastructure projects typically do not account for anticipated changes in wind strength and patterns. While simulation can be used to forecast the impact of wind speed and intensity on road maintenance costs, project developers rarely consider these and other environmental externalities in their implementation efforts. Instead, decisions on road infrastructure in the U.S. are based on the political incentives of state or city-level authorities. The result is that these road projects are not implemented in an economically or environmentally sustainable way.

By contrast, Indonesia’s Low Carbon Development Initiative (LCDI) has been a flagship example of how simulation that incorporates social and environmental considerations can have a positive impact on decision making, as Dr. Andrea Bassi and Dr. Leonardo Garrido examined in a recent IISD webinar. One feature of the plan’s simulation is the estimation of the carrying capacity, defined as the availability of natural resources and provisioning of ecosystem services. Carrying capacity can be reduced with resource extraction and with land cover change (e.g., deforestation, leading to lower water availability), resulting in resource scarcity and diminished production. Indonesia’s Medium-Term Development Plan recognizes the value of natural capital and its role in supporting economic development. By simulating outcomes, with the incorporation of natural assets, Indonesia has identified policies that make economic sense and will provide long-term benefit. 

Reforming infrastructure sectors: lessons from transport

The effects of the COVID-19 pandemic have highlighted which infrastructure sectors are in particular need of reform toward sustainable alternatives. Attaching “green strings” to recovery spending allocated to these infrastructure sectors is crucial to long-term success.

One sector that has great potential for reform is the transport sector. Despite privately owned cars being seen as one of the few forms of mobility that avoid the risk of spreading the virus, many cannot afford private transportation. Its negative environmental impact is also significant. Moreover, public transport is essential for many livelihoods, thus there is a strong case in favor of investing in safe and sustainable forms of transportation.

In fact, the pandemic has demonstrated that transport spending can and should be funneled into sustainable alternatives, instead of private options. Israel’s transport sector is one case where these principles have been successfully be applied. With fewer means of public transport available, Israel has begun transitioning from personal transportation to the use of Mobility as a Service (MaaS). MaaS offers users a route to their destination through a variety of transport options, such as carshare services, buses, trains, and taxis.

By reducing individually-owned transport, vehicle emissions and traffic-induced road deterioration will be reduced. The outcome will be lower emissions-related health costs and road maintenance costs. This sustainable alternative to individually-owned transport is an innovative solution to the mobility issues caused by the pandemic. It is also economically attractive, as MaaS is expected to grow by USD 180 billion before 2023. When compared to conventional transport spending, there is evidence that investments in sustainable transport will support a more resilient economic recovery.

Looking ahead: blending simulation with policy action

Given the immense benefits that can come from incorporating sustainability considerations into simulations, and subsequently in recovery spending, IISD has developed a series of “what-if” simulations to propose policy interventions in support of a sustainable and resilient economic recovery.

The scenario that that has been simulated so far is “what if” Canada invests in energy efficiency and flood resilience in their building sector. Forthcoming simulations were developed in collaboration with the Green Climate Fund and ask “what if” investments are made in sustainable and climate resilient communities in Ghana. These are just several of the countless scenarios that can be simulated to inform recovery spending decisions. Examples of the several infrastructure projects that IISD has assessed using its Sustainable Asset Valuation (SAVi) methodology can be found on the SAVi website. These projects are all good candidates for sustainable recovery investments as well.

The forecasted outcomes of these “what-if” simulations cannot be realized without policy change. These simulations are an essential tool for decision makers of the value of simulation and the societal benefits created by green stimulus and cannot be overlooked.