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Carbon Pricing and Global Warming: A Stock-flow Consistent Macro-dynamic Approach

Energy, Environment and Climate - Webinars
Date: Thursday, 05 April 2018

Venue: Online - See description

Presenter: Gael Giraud, Chief Economist and Executive Director of the Innovation, Research and Knowledge Directorate of the Agency for French Development

Moderator: Carlo Carraro, Professor at Ca’ Foscari University of Venice, IPCC WG3 Vice-Chair, CMCC@Ca’Foscari

Discussant: Francesco Bosello, Director of ECIP Division at the Euro-Mediterranean Center on Climate Change; Associate Professor at Statale University of Milan


Abstract
To what extent can a worldwide carbon pricing foster the transition towards a low-carbon economy and help mitigate the effects of global warming? The seminar will discuss the macroeconomic impact of carbon pricing and public subsidies and evaluate the extent to which these policies are sustainable. This is done by computing the probability to remain below two thresholds that are critical for the stability of our current economy and climate: 1) a temperature anomaly above +2°C (as set in the Paris Agreement) and 2) a global debt-to-output ratio.

We find that the upper-bound of the carbon pricing corridor advocated in the High-Level Commission on Carbon Prices (2017), when implemented together with additional public subsidies on abatement costs in the private sector, succeeds in driving the economy into the neighbourhood of a balanced growth path. With high probability, this would make it possible to cap the average Earth temperature deviation at below +2.5°C by the end of this century. Absent such strong public involvement, and provided it be captured through a sufficiently convex damage function, the impact of climate change on gross output and capital appears to be powerful enough to almost surely pull the state of the world economy towards a debt-deflationary field, potentially leading to forced degrowth in the second half of the twenty-first century. Such a flow of trajectories is characterised on shorter time scales by low growth, the rise of unemployment as well as private debt, low inflation and interest rates, together with a declining wage share. A stock-flow consistent, financial and non-linear macrodynamics with uncertainty, calibrated for the world economy is used for this analysis.

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  • Thursday, 05 April 2018

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