Abstract:

This paper presents a macroeconomic model that combines the economic impact of climate change with the pivotal role of private debt. Using a Stock-Flow Consistent approach based on the Lotka–Volterra logic, we couple its nonlinear monetary dynamics of underemployment and income distribution with abatement costs. A calibration of our model at the scale of the world economy enables us to simulate various planetary scenarios. Our findings are threefold: 1) the +2 °C target is already out of reach, absent negative emissions; 2) the long-term (resp. short-term) results of climate change on economic fundamentals may lead to severe economic consequences without the implementation (resp. in case of too rapid an application) of proactive climate policies. Global warming (resp. too fast transition) forces the private sector to leverage in order to compensate for output and capital losses (resp. to lower carbon emissions), thus endangering financial stability; 3) Implementing an adequate carbon price trajectory, as well as increasing the wage share, fostering employment, and reducing private debt make it easier to avoid unintended degrowth and to reach a +2.5 °C target.

The paper can be downloaded freely: here

Debt and damages: What are the chances of staying under the 2C warming threshold? (Bovari, Lecuyer, and McIsaac) published in International Economics.