Modeling Low Climate Stabilization with E3MG:1 Towards a ‘New Economics’ Approach to Simulating Energy-Environment-Economy System Dynamics

Abstract

The literature on climate stabilization modeling largely refers to either energy-system or inter-temporal computable general equilibrium/optimal growth models. We contribute with a different perspective by deploying a large-scale macro-econometric hybrid simulation model of the global energy-environment-economy (E3MG) adopting a “New Economics” approach. We use E3MG to assess the implications of a low-stabilization target of 400ppm CO2 equivalent by 2100, assuming both fiscal instruments and regulation. We assert that if governments adopt more stringent climate targets for rapid and early decarbonization, such actions are likely to induce more investment and increased technological change in favor of low-carbon alternatives. Contrary to the conventional view on the economics of climate change, a transition towards a low-carbon society as modeled with E3MG leads to macroeconomic benefits, especially in conditions of unemployment, with GDP slightly above a reference scenario, depending on use of tax or auction revenues. In addition, more stringent action can lead to higher benefits.