Coping with the Collapse: A Stock-Flow Consistent
Monetary Macrodynamics of Global Warming
Gaël Giraud† Florent Mc Isaac‡ Emmanuel Bovari§
Ekaterina Zatsepina¶
October 3, 2016
Abstract
This paper presents a macroeconomic model of endogenous growth that enables to take into consideration both the economic impact of climate change and the pivotal role of private debt. Using a Goodwin-Keen approach [24], based on the Lotka-Volterra logic, we couple its nonlinear dynamics of underemployment andincome distribution with abatement costs. Moreover, various damage functions `a la Nordhaus ([37]) and Dietz-Stern ([6]) reflect the loss in final production due to the temperature increase caused by the rising levels of CO2 emissions. An empirical estimation of the model at the world-scale enables us to simulate plausible trajectories for the planetary business-as-usual scenario. Our main finding is that, even though the short-run impact of climate change on economic fundamentals may seem prima facie rather minor, its long-run dynamic consequences may lead to an extreme downside. Under plausible circumstances, global warming forces the private sector to leverage in order to compensate for output losses; the private debt overhang may eventually induce a global financial collapse, even before climate change could cause serious damage to the production sector. Under more severe conditions, the interplay between global warming and debt may lead to a secular stagnation followed by a collapse in the second half of this century. We analyze the extent to which slower demographic growth or higher carbon pricing allow a global breakdown to be avoided. The paper concludes by examining the conditions under which the +1.5 C target, adopted by the Paris Agreement (2015), could be reached.
Keywords Climate change, endogenous growth, damage function, integrated assessment,
collapse, stock-flow consistency, Goodwin, debt, secular stagnation.
JEL Classification Numbers: C51, D72, E12, O13, Q51, Q54
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