Coping with the Collapse: A Stock -Flow Consistent Monetary Macrodynamics of Global Warming – Updated Version

This paper presents a macroeconomic model of endogenous growth that takes into consideration the economic impact of climate change, the pivotal role of private debt and income distribution. Using a Goodwin-Keen approach, based on the Lotka-Volterra logic, we couple its nonlinear monetary dynamics of underemployment and income distribution with abatement costs. Various damage functions à la Nordhaus, Dietz-Stern, and Burke et al. reflect the loss in final production, stock of capital, and labor productivity due to the rise in temperature. An empirical calibration of our model at the world-scale enables us to simulate plausible trajectories for a 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 and capital 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 towards the end of this century. However, it turns out that increasing the wage share, fostering employment, or reducing the private-debt-to-output ratio makes it easier to avoid a collapse. The paper concludes by examining the conditions under which the +1.5°C and +2°C targets, adopted by the Paris Agreement (2015), could be reached thanks to an adequate carbon price trajectory.

Paper published in AFD Research Paper Series, n° 2017-29 bis, January 2017.
It is an Updated Version of the article. The previous version (july 2016) can be read here.