Economics of climate change: introducing the Basic Climate Economic (BCE) model

Lucas Bretschger,Christos Karydas

doi:10.1017/s1355770x19000184

Abstract

AbstractEnvironmental economics models are often too complex to be communicated in an illustrative manner. For this reason, this paper develops the Basic Climate Economic (BCE) model that features core elements of macroeconomic and climate economic modelling, while allowing for an illustrative examination of the development path. The BCE model incorporates fossil stock depletion, pollution stock accumulation, endogenous growth, and climate-induced capital depreciation. We first use graphical analysis to show the effects of climate change and climate policy on economic development. Intuition for the different model mechanisms, the functional forms, and the effects of different climate policies is provided. We then show the model equations in mathematical terms to derive closed-form solutions and to run model simulations relating to the graphical part. Finally, we compare our setup to other models of climate economics.

Highlights

Since the seminal contribution of Pigou (1920), it has been known that market failures caused by negative pollution externalities can be corrected by environmental policies
We develop a simple flexible framework that integrates the economic approach to climate change labelled the ‘Basic Climate Economic model’; the BCE model
Climate change and damages Before we describe the macroeconomic environment, we present our assumptions on the climate system, on pollution, and how it feeds back in the economy by destroying stocks of available capital

Summary

Introduction

Since the seminal contribution of Pigou (1920), it has been known that market failures caused by negative pollution externalities can be corrected by environmental policies. What is lacking in the literature is an illustrative general model showing the basic theoretical relationships of an economic climate model, including the most recent advances, in an intuitive manner Such an approach can be used for educational activities and for communication, mainly within the scientific community and with policy makers and the broader public. In order to be useful for communication and broad knowledge diffusion, the paper starts by working with figures and verbal explanations This should underline the basic reasoning in climate economics, show the different model parts in an intuitive form, and reveal the specific effects of different model assumptions.

Climate policies

Formal analysis

Theory

Policy effects

Findings

Conclusions