Faraway, So Close: Coupled Climate and Economic Dynamics in an Agent-Based Integrated Assessment Model

In this work we develop an agent-based model that offers an alternative to standard, computable general equilibrium integrated assessment models (IAMs). The Dystopian Schumpeter meeting Keynes (DSK) model is composed of heterogeneous firms belonging to capital-good, consumption-good and energy sectors. Production and energy generation lead to greenhouse gas emissions, which affect temperature dynamics. Climate damages are modelled at the individual level as stochastic shocks hitting workers' labour productivity, energy efficiency, capital stock and inventories of firms. In that, aggregate damages emerge from the aggregation of losses suffered by heterogeneous, interacting and boundedly rational agents. The model is run focusing on a business-as-usual carbon-intensive scenario consistent with a Representative Concentration Pathway 8.5. We find that the DSK model is able to account for a wide ensemble of micro- and macro-empirical regularities concerning both economic and climate dynamics. Simulation experiments show a substantial lack of isomorphism between the effects of micro- and macro-level shocks, as it is typical in complex system models. In particular, different types of shocks have heterogeneous impact on output growth, unemployment rate, and the likelihood of economic crises, pointing to the importance of the different economic channel affected by the shock. Overall, we report much larger climate damages than those projected by standard IAMs under comparable scenarios, suggesting possible shifts in the growth dynamics, from a self-sustained pattern to stagnation and high volatility, and the need of urgent policy interventions.