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

To what extent can a worldwide carbon pricing foster the transition towards a low-carbon economy and help mitigate the effects of global warming? We address this question using a stock-flow consistent, financial and non-linear macrodynamics with uncertainty, calibrated for the world economy. More precisely, we assess the macroeconomic impact of carbon pricing and public subsidies by computing the probability densities of a large set of macroeco- nomic variables. Besides, we evaluate the extent to which such policies are sustainable, by computing the probability to remain below two thresholds that we argue to be critical for the stability of our current economy and cli- mate: 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 probabil- ity, this would make it possible to cap the average Earth temperature de- viation at below +2.5◦C by the end of this century. Absent such strong public involvement, and provided it be captured through a sufficiently con- vex 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.

Published in AFD Research Papers Series – N°2018-65.