Faraway, So Close: Coupled Climate and Economic Dynamics in an Agent-based Integrated Assessment Model

Authored by Mauro Napoletano, Alessandro Sapio, Andrea Roventini, G Dosi

Date Published: 2018

DOI: 10.1016/j.ecolecon.2018.03.023

Sponsors: European Union

Platforms: No platforms listed

Model Documentation: Other Narrative Mathematical description

Model Code URLs: Model code not found

Abstract

In this work we develop an agent-based model that offers an alternative to standard, computable general equilibrium integrated assessment models (IAMs). The Dystopian Schumpeter meeting Keynes (DSK) model is composed of heterogeneous firms belonging to capital-good, consumption-good and energy sectors. Production and energy generation lead to greenhouse gas emissions, which affect temperature dynamics. Climate damages are modelled at the individual level as stochastic shocks hitting workers' labour productivity, energy efficiency, capital stock and inventories of firms. In that, aggregate damages emerge from the aggregation of losses suffered by heterogeneous, interacting and boundedly rational agents. The model is run focusing on a business-as-usual carbon-intensive scenario consistent with a Representative Concentration Pathway 8.5. We find that the DSK model is able to account for a wide ensemble of micro- and macro-empirical regularities concerning both economic and climate dynamics. Simulation experiments show a substantial lack of isomorphism between the effects of micro- and macro-level shocks, as it is typical in complex system models. In particular, different types of shocks have heterogeneous impact on output growth, unemployment rate, and the likelihood of economic crises, pointing to the importance of the different economic channel affected by the shock. Overall, we report much larger climate damages than those projected by standard IAMs under comparable scenarios, suggesting possible shifts in the growth dynamics, from a self-sustained pattern to stagnation and high volatility, and the need of urgent policy interventions.

Tags

Agent-based models Climate change Integrated assessment Uncertainty Risk Business cycles investment Output growth Social cost Fiscal-policies Macro-economic dynamics Climate damages Carbon-dioxide exchange Granger causality Atmospheric co2