Beyond climate economics orthodoxy: impacts and policies in the agent-based integrated-assessment DSK model*

Abstract

Though climate physical and transition risks will likely affect socio-economic dynamics along any transition pathway, their unfolding is still poorly understood. This also affects the development of climate-change policies to achieve sustainable growth. In this paper, the authors discuss a series of results, assessing the materiality of climate risks for economic and financial stability and alternative policy pathways by means of the Dystopian Schumpeter meeting Keynes (DSK) agent-based integrated-assessment model. Their results suggest that the emergence of tipping points due to unmitigated physical risks will reduce long-run growth and spur financial and economic instability. Moreover, diverse types of climate shocks have a different impact on economic dynamics and on the chances of observing a transition to carbonless growth. While these results call for immediate and ambitious interventions, appropriate mitigation policies need to be designed. The authors’ results show that carbon taxation is not the most suitable tool to achieve zero-emission growth, given its serious transition costs. On the contrary, command-and-control regulation and innovation policies to foster green investments are the key elements of the most promising policy mix to put the economy on a green growth pathway. Overall, their results contradict the standard tenets of cost–benefit climate economics and suggest the absence of any trade-off between decarbonization and growth.