Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary...
Transcript of Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary...
![Page 1: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/1.jpg)
0/65
#WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT
AGENCY
Carbon Pricing and Public Spending in
a Stock-Flow Consistent, Monetary Macro-dynamics of
Global Warming
May 20, 2017
Gaël Giraud Florent Mc Isaac Emmanuel Bovari
Energy and Prosperity Chair
![Page 2: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/2.jpg)
1/65
� Summary
1 Introduction
2 Context
3 II. The set-up
4 Climate prospective
5 Adding public intervention (2017)
![Page 3: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/3.jpg)
2/65
� GEMMESOverview of the research program
GEMMESGEneral Monetary Multisectoral Macrodynamics for the Ecological Shifts
![Page 4: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/4.jpg)
3/65
� GEMMESOverview of the research project
Akerlof-Stiglitz (1969) Keen (1995) Prices
Banks
Inventories
Government
SpeculationInequalities
Multisectoral
Climate backloop
Open economy
Resources
![Page 5: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/5.jpg)
4/65
� IntroductionClimate change as a milestone for the XXIst century
![Page 6: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/6.jpg)
5/65
� IntroductionThe 2008 crisis: a revival of Minsky’s theory of financial instability
myf.red/g/7Dv0
-4
-3
-2
-1
0
1
2
3
4
5
4.0
4.8
5.6
6.4
7.2
8.0
8.8
9.6
10.4
11.2
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
fred.stlouisfed.org
NonfinancialBusiness;CreditMarketInstruments;Liability,Level/GrossDomesticProduct(left)CivilianUnemploymentRate(right)
%C
hg.o
f(B
il.o
f$/B
il.o
f$)
Percent
Figure: Time series of the private debt ratio and employment rate in the United States over the period 1990-2010.
![Page 7: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/7.jpg)
6/65
� IntroductionThe trouble with macroeconomics
� Fankhauser-Stern (MIT press, 2016)... we should seek a dynamic economics where we tackle directly issuesinvolving pace and scale of change in the context of major and systemicrisks.
� Blanchard (PIIE, 2016):I see the current DSGE models as seriously flawed...
� Romer (2016):For more than three decades, macroeconomics has gone backwards...
� Kocherlakota (2016):...we simply do not have a settled successful theory of the macroecon-omy. The choices made 25-40 years ago - made then for a number ofexcellent reasons - should not be treated as written in stone or even inpen.
![Page 8: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/8.jpg)
7/65
� IntroductionKey research highlights
1. Combine two sources of global instabilities (climate and finance) in a min-imal dynamic framework to shed some prospective light on the climate-economy interactions
2. Identify the instability factors and their transmission channels (in particularthe pivotal role of private debt)
3. Provide public policy guidance for the implementation of the objective tocontain global warming as close as possible to +1.5◦C and “‘well below”+2◦C
![Page 9: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/9.jpg)
8/65
� Summary
1 Introduction
2 ContextThe Keen model (1995)[? ]
The DICE model (2013)[? ]
3 II. The set-up
4 Climate prospective
5 Adding public intervention (2017)
![Page 10: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/10.jpg)
9/65
� Summary
1 Introduction
2 ContextThe Keen model (1995)[? ]
The DICE model (2013)[? ]
3 II. The set-up
4 Climate prospective
5 Adding public intervention (2017)
![Page 11: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/11.jpg)
10/65
� Context – The Keen model (1995)[? ]
Theoretical elements
� Minimal (bounded) rationality
� Endogenous business cycles as in Akerlof-Stiglitz (1969).
� Mathematical formalization of Minsky’s ideas� Lotka-Volterra relationship linking the employment rate to the wage share� Dynamics of corporates’ private debt.� Short-term Phillips curve (Mankiw (2010), Krugman (2014), Gordon (2016))� Investment as a function of profit share
� Multiplicity of long-term equilibria:� A Solovian steady-state equilibrium� A bad attractor leading to a breakdown in the long-run.� Their asymptotic local stability becomes key.
![Page 12: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/12.jpg)
11/65
� Context – The Keen model (1995)[? ]
The model
λ, the employment rate.
λ :=LN.
L, the labor force, and N, the total population.
NN
= β.
a, the labor productivity.aa
= α.
w , the wage per worker, W = wL, the total wage and Y , the real productiondefine ω, the wage share:
ω =WY
=wLaL
=wa
![Page 13: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/13.jpg)
12/65
� Context – The Keen model (1995)[? ]
The model
K : capital.K = I − δK .
Leontief production function
Y = min(
Kν, aL
)=
Kν
= aL.
But CES (McIsaac et al. 2016), Putty-Clay (Giraud-Lojkine, 2017)...
![Page 14: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/14.jpg)
13/65
� Context – The Keen model (1995)[? ]
The model
D: the aggregate debt.D = I − Π.
with Π := Y − W − rD: the real profit of the firm, and r the interest rate.
π: the profit-to-production ratio.
π =Π
Y.
d : the debt-production ratio.
d =DY.
![Page 15: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/15.jpg)
14/65
� Context – The Keen model (1995)[? ]
Aggregate behaviours
� The Short-term Phillips Curve (Mankiw, 2010 and Krugman, 2014).
ww
= φ(λ).
� The Investment Function : an increasing function of the profit share andoutput.
I = κ (π) Y .
![Page 16: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/16.jpg)
15/65
� Context – The Keen model (1995)[? ]
The three-dimensional system
One can retrieve the following 3-dim. non-linear system:
ω = ω [φ(λ) − α]
λ = λ
[κ(π)
ν− δ − α− β
]d = d
[r − κ(π)
ν+ δ
]+ κ(π) − (1 − ω)
![Page 17: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/17.jpg)
16/65
� Context – The Keen model (1995)[? ]
Aggregate behaviors
� Phenomenological approach: φ(.) and κ(.) are empirically estimated.
� Sonnenschein-Mantel-Debreu (1975): “anything can happen”. (“Emer-gence”.)
![Page 18: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/18.jpg)
17/65
� Context – The Keen model (1995)[? ]
Convergence to the locally asymptotically stable steady-state equilibrium
Figure: Phase diagram in the Keen model (1995)[? ].
![Page 19: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/19.jpg)
18/65
� Context – The Keen model (1995)[? ]
Viability analysis through the basin of attraction
Figure: Basin of attraction of the desirable steady-state in the Keen model. Source: Grasselli et al. (2012)[? ]
![Page 20: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/20.jpg)
19/65
� Context – The Keen model (1995)[? ]
Stock-Flow consistency
Households Firms Banks SumBalance SheetCapital stock K KDeposits Mh M f −MLoans −L LSum (net worth) X h X f X b XTransactions current capitalConsumption −C CInvestment I −IAccounting memo [GDP] [Y ]Wages W −WInterests on deposits rMh rM f −rMInterests on loans −rL rLFinancial Balances Sh Π −I Sb
Flow of fundsGross Fixed Capital Formation I IChange in Deposits Mh M f −MChange in loans −L LColumn sum Sh Π Sb IChange in net worth X h = Sh X f = Π − δK X b = Πb X
Table: Balance sheet, transactions, and flow of funds in the economy
![Page 21: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/21.jpg)
20/65
� Summary
1 Introduction
2 ContextThe Keen model (1995)[? ]
The DICE model (2013)[? ]
3 II. The set-up
4 Climate prospective
5 Adding public intervention (2017)
![Page 22: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/22.jpg)
21/65
� Context – The DICE model (2013)[? ]
A seminal model of IAMs
Figure: Trajectories from the model Dynamic Integrated Climate Economy (DICE). Source: Nordhaus (2013)[? ].
![Page 23: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/23.jpg)
22/65
� Summary
1 Introduction
2 Context
3 II. The set-upThe macroeconomic frameworkThe climate moduleClimate damages and mitigationWrap-up: stock-flow consistent tableNumerical analysis
4 Climate prospective
5 Adding public intervention (2017)
![Page 24: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/24.jpg)
23/65
� II. The set-upKey modeling highlights
Taking advantage of two prominent models:
� The macrodynamics of Keen (1995)[? ] refined with:� Price dynamics under imperfect competition (Grasselli et al. (2014)[? ])� Sigmoïd pattern of the global workforce (UN population scenarios (2015)[? ])� Dividends payments of firms to households� Public spending and taxes, hence, public debt.
� The DICE climate backloop of Nordhaus (2013)[? ] refined with:� More convex damage functions (Weitzman (2011)[? ], Dietz et al. (2015)[? ])� Allocation of environmental damage between:
1. Output
2. Capital accumulation (Dietz et al. (2015)[? ])
3. Labor productivity (Burke et al. (2015)[? ])
![Page 25: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/25.jpg)
24/65
� Summary
1 Introduction
2 Context
3 II. The set-upThe macroeconomic frameworkThe climate moduleClimate damages and mitigationWrap-up: stock-flow consistent tableNumerical analysis
4 Climate prospective
5 Adding public intervention (2017)
![Page 26: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/26.jpg)
25/65
� II. The set-up – The macroeconomic framework� Absent any public intervention, a 4-dim. system:
ω = ω[
Φ(λ) − (1 − γ)i(ω) − aa
]λ = λ
[YY − a
a − NN
]d = d
[r −
(YY + i(ω)
)]+ κ(π) + ∆(π) − (1 − ω)
N = qN(
1 − NPN
)� with the following auxiliary variables:
π = 1 − ω − rd
YY
=κ(π)
ν− δ
i(ω) = ηp(mω − 1) + c
� Estimated over a reconstructed world economy (85% of the “real” worldeconomy).
![Page 27: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/27.jpg)
26/65
� II. The set-up – The macroeconomic frameworkConvergence toward a steady-state without climate change
Figure: Phase diagram in the absence of climate damage.
![Page 28: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/28.jpg)
27/65
� Summary
1 Introduction
2 Context
3 II. The set-upThe macroeconomic frameworkThe climate moduleClimate damages and mitigationWrap-up: stock-flow consistent tableNumerical analysis
4 Climate prospective
5 Adding public intervention (2017)
![Page 29: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/29.jpg)
28/65
� II. The set-up – The climate modulePhysical process overview
Real Output
CO2 Emissions
CO2 Accumulation
Radiative Forcing
Temperature Change
Figure: Climate-economy interactions diagram.
![Page 30: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/30.jpg)
29/65
� II. The set-up – The climate moduleCO2 emissions
Global CO2 emissions are the sum of two contributions: E := Eind + Eland
� Endogenous industrial emissions:
Eind := Yσ(1 − n)
� Proportional to real output Y
� Emission intensity of the economy: σ
� Emissions reduction rate: n
� Exogenous emissions linked to land-use change Eland
![Page 31: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/31.jpg)
30/65
� II. The set-up – The climate moduleCO2 accumulation (1/2)
Layer AT
Atmosphere
Layer UP
Biosphere Upper part of the oceans
Layer AT
Lower part of the oceans
Three-Layer Model of CO2 Accumulation
CO2 Emissions
Radiative Forcing
Figure: CO2 accumulation in a three-layer model.
![Page 32: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/32.jpg)
31/65
� II. The set-up – The climate moduleTemperature change (1/2)
Upper Layer
AtmosphereBiosphere
Upper part of the oceans
Lower Layer
Lower part of the oceans
Two-Layer Model of Mean Temperature
Radiative Forcing
Real Output Damage
Figure: Dynamics of temperature.
![Page 33: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/33.jpg)
32/65
� Summary
1 Introduction
2 Context
3 II. The set-upThe macroeconomic frameworkThe climate moduleClimate damages and mitigationWrap-up: stock-flow consistent tableNumerical analysis
4 Climate prospective
5 Adding public intervention (2017)
![Page 34: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/34.jpg)
33/65
� II. The set-up – Climate damages and mitigationEnvironmental damages due to global warming (2/2)
0.0
0.2
0.4
0.6
0.8
1.0
0 1 2 3 4 5 6
Dam
ages
(fr
acti
on
of
ou
tpu
t)
Temperature increase (°C)
Nordhaus Weitzman Dietz and Stern
Figure: Comparison of the shape of covered damage functions.
![Page 35: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/35.jpg)
34/65
� II. The set-up – Climate damages and mitigationAllocation of environmental damages between output flows and capital stock
� Allocation of damages according to:
� Damages on capital stock:DK := fK D
� Damages on output flows:
DY := 1 −1 − D
1 − DK
� Introduction of damages in the macroeconomic model:
� Capital accumulation:K := I − (δ + DK)K
� Production function:Y := (1 − DY)
Kν
![Page 36: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/36.jpg)
35/65
� II. The set-up – Climate damages and mitigationEnvironmental damages on labor productivity
� Alternate definition of the damage function introduced by Burke et al.(2015)[? ] as a quadratic alteration of the labor productivity.
� Endogenous labor productivity growth:
aa
:= α1Ta + α2T 2a
� If it gets hot, we’re less productive!
![Page 37: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/37.jpg)
36/65
� II. The set-up – Climate damages and mitigationMitigation effort
� Emission reduction rate n set by public authorities (cf. Nordhaus (2013)[? ]):
� Exogenous trajectories of the carbon price pC
� Exogenous decreasing trajectories of the backstop technology pNC
� Arbitrage relationship:
n := min
{(pc
pNC
) 1θ2−1
; 1
}
� Real abatement costs CO2 GY depending on emission intensity σ withG := θ1nθ2
![Page 38: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/38.jpg)
37/65
� II. The set-up – Climate damages and mitigationAbatement cost of carbon
� The burden of mitigation efforts = the abatement cost of carbon: G :=θ1σpBSnθ2
� This cost is entirely borne by firms:
� Effective Gross Capital Fixed Formation: Ief := (κ(π) − µG)Y
� Accumulation of capital:
K := Ief − δK
= κ(π)Y −(δ + DK +
µ
νG)
K
� Dynamics of private debt:
D := pI + ∆(π)pY − Π
![Page 39: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/39.jpg)
38/65
� Summary
1 Introduction
2 Context
3 II. The set-upThe macroeconomic frameworkThe climate moduleClimate damages and mitigationWrap-up: stock-flow consistent tableNumerical analysis
4 Climate prospective
5 Adding public intervention (2017)
![Page 40: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/40.jpg)
39/65
� II. The set-up – Wrap-up: stock-flow consistent tableStock-flow consistency
Households Firms Banks SumBalance Sheetcapital pK pKDeposits Mh M f −MLoans −L LEquities Eb + E f −E f −Eb
Sum (net worth) X h X f X b XTransactions current capitalConsumption −pC pCInvestment pI −pIAccounting memo [GDP] [pY ]Wages W −WDividends Di + r(L − M) −Di −r(L − M)Interests on loans −rL rLInterests on deposits +rMh +rM f −rMFinancial Balances Sh Π −pI − Di 0Flow of FundsGross Fixed Capital Formation pI pIChange in deposits Mh M f −MChange in loans −L LChange in equities E f + Eb −E f −Eb
Column sum Sh Π − Di 0 pI
Table: Balance sheet, transactions, and flow of funds in the economy
![Page 41: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/41.jpg)
40/65
� Summary
1 Introduction
2 Context
3 II. The set-upThe macroeconomic frameworkThe climate moduleClimate damages and mitigationWrap-up: stock-flow consistent tableNumerical analysis
4 Climate prospective
5 Adding public intervention (2017)
![Page 42: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/42.jpg)
41/65
� II. The set-up – Numerical analysisBifurcations of the steady-state due to temperature change
Figure: Damages on output and capital stock. Figure: Damages on capital and labor productivity.
![Page 43: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/43.jpg)
42/65
� II. The set-up – Numerical analysisBasin of attraction of the steady-state
Figure: Without climate change. Figure: Damages on capital and labor productivity.
![Page 44: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/44.jpg)
43/65
� Summary
1 Introduction
2 Context
3 II. The set-up
4 Climate prospectiveScope of analysisLow mitigation constraintUsing a carbon-price instrument
5 Adding public intervention (2017)
![Page 45: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/45.jpg)
44/65
� Summary
1 Introduction
2 Context
3 II. The set-up
4 Climate prospectiveScope of analysisLow mitigation constraintUsing a carbon-price instrument
5 Adding public intervention (2017)
![Page 46: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/46.jpg)
45/65
� Climate prospective – Scope of analysisDesign of the prospective scenarios
� Prospective analysis through 5 classes of scenarios:
Scenario Baseline Nordhaus Weitzman Burke SternDamage Type - Nordhaus Weitzman Weitzman SternOn output - Yes Yes - -On capital - - Yes Yes YesOn labor productivity - - - Yes Yes
� Using a carbon-price instrument:
1. Low-constraining paths2. Paths compatible with the limitation of global warming of of the Paris
Agreement (+2◦C, as close as possible to the +1.5◦C)3. Proposal of minimal paths for public policy implementation
![Page 47: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/47.jpg)
46/65
� Summary
1 Introduction
2 Context
3 II. The set-up
4 Climate prospectiveScope of analysisLow mitigation constraintUsing a carbon-price instrument
5 Adding public intervention (2017)
![Page 48: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/48.jpg)
47/65
� Climate prospective – Low mitigation constraintAn imperious need for public involvement (1/2).
-0.03
0.00
0.03
0.06
2000 2050 2100 2150 2200 2250 2300
ScenariosBaselineNordhausWeitzmanBurkeStern
Real growth rate
-0.04
-0.02
0.00
0.02
0.04
2000 2050 2100 2150 2200 2250 2300
ScenariosBaselineNordhausWeitzmanBurkeStern
Inflation rate
0.0
0.2
0.4
0.6
0.8
1.0
2000 2050 2100 2150 2200 2250 2300
ScenariosBaselineNordhausWeitzmanBurkeStern
Employment rate
0
2
4
6
8
2000 2050 2100 2150 2200 2250 2300
ScenariosBaselineNordhausWeitzmanBurkeStern
Private debt ratio
0
5
10
15
20
25
2000 2050 2100 2150 2200 2250 2300
ScenariosBaselineNordhausWeitzmanBurkeStern
Global emissions per capita
0
2
4
6
8
10
2000 2050 2100 2150 2200 2250 2300
ScenariosBaselineNordhausWeitzmanBurkeStern
Mean atmospheric temperature deviation
Figure: Trajectories of the main macroeconomic and climate variables.
![Page 49: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/49.jpg)
48/65
� Climate prospective – Low mitigation constraintAn imperious need for public involvement (2/2).
Scenario Baseline Nordhaus Weitzman Burke SternAverage real GDP growth wrt 2010-2100 2.81% 2.75% 2.62% 1.73% 1.15%Private debt ratio in 2100 1.44 1.65 3.19 1.73 7.50CO2 emissions per capita in 2050 - 7.82 t CO2 7.77 t CO2 6.41 t CO2 5.26 t CO2Temperature change in 2100 - +3.98◦C +3.96◦C +3.52◦C +3.49◦CCO2 concentration in 2100 - 975 ppm 960 ppm 753 ppm 732 ppm
Table: Key values of the world economy.
![Page 50: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/50.jpg)
49/65
� Summary
1 Introduction
2 Context
3 II. The set-up
4 Climate prospectiveScope of analysisLow mitigation constraintUsing a carbon-price instrument
5 Adding public intervention (2017)
![Page 51: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/51.jpg)
50/65
� Climate prospective – Using a carbon-price instrumentAchieving the +2◦C target – Stability vs Indebtedness trade-offs.
0.00
0.25
0.50
0.75
1.00
2010 2020 2030 2040 2050
Initial Price1234567891011121314151617181920
Emission-reduction rate
0
50
100
150
200
250
2010 2020 2030 2040 2050
Initial Price1234567891011121314151617181920
Real output
1
2
3
2010 2020 2030 2040 2050
Initial Price1234567891011121314151617181920
Private debt ratio
0.01
0.02
0.03
0.04
0.05
2010 2020 2030 2040 2050
Initial Price1234567891011121314151617181920
Real output growth
Figure: Weitzman scenario - trajectories of some key economic variables obtained with minimal carbon price paths.
![Page 52: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/52.jpg)
51/65
� Climate prospective – Using a carbon-price instrumentAchieving the +2◦C target – Initial carbon-price of 1 (1/2).
-0.03
0.00
0.03
0.06
2000 2050 2100 2150
ScenariosNordhausWeitzmanBurkeStern
Real growth rate
-0.04
-0.02
0.00
0.02
0.04
2000 2050 2100 2150
ScenariosNordhausWeitzmanBurkeStern
Inflation rate
0.0
0.2
0.4
0.6
0.8
1.0
2000 2050 2100 2150
ScenariosNordhausWeitzmanBurkeStern
Employment rate
0
2
4
6
8
2000 2050 2100 2150
ScenariosNordhausWeitzmanBurkeStern
Private debt ratio
0
5
10
15
20
25
2000 2050 2100 2150
ScenariosNordhausWeitzmanBurkeStern
Global emissions per capita
0
2
4
6
2000 2050 2100 2150
ScenariosNordhausWeitzmanBurkeStern
Mean atmospheric temperature deviation
Figure: Trajectories of the main macroeconomic and climate variables.
![Page 53: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/53.jpg)
52/65
� Climate prospective – Using a carbon-price instrumentAchieving the +2◦C target – Initial carbon-price of 1 (2/2).
Scenario Baseline Nordhaus Weitzman Burke SternAverage real GDP growth wrt 2010-2100 2.81% 2.79% 2.78% 2.08% 2.07%Private debt ratio in 2100 1.44 2.15 2.50 2.08 2.34CO2 emissions per capita in 2050 - 0.07 t CO2 0.07 t CO2 0.07 t CO2 0.07 t CO2Temperature change in 2100 - +2.00◦C +2.00◦C +2.00◦C +2.00◦CCO2 concentration 2100 - 396 ppm 396 ppm 396 ppm 396 ppm
Table: Key values of the world economy.
![Page 54: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/54.jpg)
53/65
� Climate prospective – Using a carbon-price instrumentAchieving the +1.5◦C target – Stability vs Indebtedness trade-offs.
0.00
0.25
0.50
0.75
1.00
2010 2012 2014 2016 2018 2020
Initial Price1234567891011121314151617181920
Emission-reduction rate
Figure: Weitzman scenario - trajectories of some key economic variables obtained with minimal carbon price paths.
![Page 55: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/55.jpg)
54/65
� Summary
1 Introduction
2 Context
3 II. The set-up
4 Climate prospective
5 Adding public intervention (2017)Carbon pricingPublic spending and taxes
![Page 56: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/56.jpg)
55/65
� Adding public intervention (2017)A recalibration
� Climate backloop recalibrated according to Nordhaus (2016) : http://cowles.yale.edu/sites/default/files/files/pub/d20/d2057.pdf
� The study confirms past estimates of likely rapid climate change overthe next century if there are not major climate-change policies. It sug-gests that it will be extremely difficult to achieve the 2C target of interna-tional agreements even if ambitious policies are introduced in the nearterm. The required carbon price needed to achieve current targets hasrisen over time as policies have been delayed.
![Page 57: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/57.jpg)
56/65
� Adding public intervention (2017)A recalibration- 2
� Climate sensitivity 3.1 and strongerr inertia of CO2 in the atmosphere.� Radiative forcing for other GHG following IPCC.� If GHG emissions stop at 01/01/2016, temperature rise is +1.9096.� Adding soils’ contribution to CO2 leads to +1.9755.� If industrial emissions stop at 01/01/2018, temperature rise becomes +2.0327.
� Conclusion : without negative emissions, it is already too late for the 2◦Ctarget.
![Page 58: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/58.jpg)
57/65
� Summary
1 Introduction
2 Context
3 II. The set-up
4 Climate prospective
5 Adding public intervention (2017)Carbon pricingPublic spending and taxes
![Page 59: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/59.jpg)
58/65
� Adding public intervention (2017)
� Volontarist policy starts at 01/01/2018.� Carbon pricing, pC , in US$2015 per ton CO2-e.� Abatement cost, n = 1: transition towards zero-carbon completed.
Couleurs :� Closest achievable path to +2◦ – Completed transition date: August 2018!;� +2.25 – Completed transition date: Jan 2028;� +2.5 – Completed transition date: Feb 2039;� +3 – Completed transition date: March 2061.
![Page 60: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/60.jpg)
59/65
� Adding public intervention (2017)
2020 2040 2060 2080 2100
0200
400
p_C
2020 2040 2060 2080 2100
0.0
0.4
0.8
n
2020 2040 2060 2080 2100
1.0
2.0
3.0
T
![Page 61: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/61.jpg)
60/65
� Summary
1 Introduction
2 Context
3 II. The set-up
4 Climate prospective
5 Adding public intervention (2017)Carbon pricingPublic spending and taxes
![Page 62: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/62.jpg)
61/65
� Adding public intervention (2017)Changes in the model
� Public subsidies : 95% of abatement costs.� Carbon tax: pc .� Public debt serviced at r .� r : Taylor rule (1993).� Suppose labor prod. grows at 2% + Dietz-Stern damages.
� Courtesy of public intervention, transition can be completed in Dec 2033instead of Feb 2039.
� Temperature rise in 2100 +2.346◦C.� But temperature keeps rising after 2100... ! (though at slower pace than
without public spending)
� Blue: without public intervention;� Red: with public intervention.
![Page 63: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/63.jpg)
62/65
� Adding public intervention (2017)Public intervention speeds the energy shift (the Dietz-Stern case)
2020 2040 2060 2080 2100
0200
400
p_C
2020 2040 2060 2080 2100
1.0
1.5
2.0
T
2020 2040 2060 2080 2100
0.0
0.4
0.8
n
![Page 64: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/64.jpg)
63/65
� Adding public intervention (2017)State intervention reduces unemployment and inflation
2020 2040 2060 2080 2100
0.58
0.62
0.66
omega
2020 2040 2060 2080 2100
0.67
0.70
0.73
lambda
2020 2040 2060 2080 2100
1.4
1.8
d
2020 2040 2060 2080 2100
0.005
0.015
0.025
inflation
![Page 65: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/65.jpg)
64/65
� Adding public intervention (2017)What about public debt?
2020 2040 2060 2080 2100
01
23
45
6
% o
f GD
P
![Page 66: Carbon Pricing and Public Spending in 0.5ema Stock-Flow ... · a Stock-Flow Consistent, Monetary Macro-dynamics of Global Warming May 20, 2017 Gaël Giraud Florent Mc Isaac Emmanuel](https://reader033.fdocuments.us/reader033/viewer/2022041912/5e67e963429875231e1c08c5/html5/thumbnails/66.jpg)
65/65
� Adding public intervention (2017)What about the interest rate?
2020 2040 2060 2080 2100
01
23
Per
cent