Central Bank of Luxembourg publishes research using a transport-equation approach and an extended Solow model to project carbon-intensity dynamics to 2050

The Central Bank of Luxembourg has published Cahier d’études No. 198, a research paper that develops a simplified framework to model how CO2 emissions and carbon intensity evolve over time and how climate policies could affect future trajectories, in the context of the European System of Central Banks’ intensified climate research focus. Empirically, the paper finds that since 1995 the distribution of carbon intensity across large economies follows a path well approximated by a transport equation from physics; with two estimated parameters, the model generates 2050 projections close to those from international organisations while remaining simple to implement. Theoretically, it extends the Solow growth model by introducing “green” capital that reduces emissions, which yields a transport equation for carbon intensity and supports policy analysis; results point to technological progress as a larger driver of recent carbon-intensity declines than sectoral shifts, and suggest that raising investment in green capital to 5% of global GDP by 2050 could reduce emissions to 13 billion tonnes, near the International Energy Agency’s projections based on current climate targets. The paper notes that the views expressed are those of the authors and not necessarily those of the Central Bank of Luxembourg or the Eurosystem.