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Abstract:
The interactions between climate and the socio-economic system are investigated with a Multi-Actor Dynamic Integrated Assessment Model (MADIAM) obtained by coupling a nonlinear impulse response model of the climate sub-system (NICCS) to a multi-actor dynamic economic model (MADEM). The main goal is to initiate a model development that is able to treat the dynamics of the coupled climate socio-economic system, including endogenous technological change, in a non-equilibrium situation, thereby overcoming some of the limitations of standard economic modelling approaches.
The core of MADEM describes an economy driven by the opposing forces of business, striving to increase profits by investments in human and physical capital, and the erosion of profits through business competition, enhanced by labour wage pressure. The principal driver of economic growth is the increase in labour productivity (human capital) generated by endogenous technological change. In the presence of climate change, these basic interactions are modified by government taxes on CO2 emissions, which are recycled into the economy as various subsidies, by climate-related changes in consumer preferences, and by modified business investment decisions in response to these actions.
The combined effect of the climate-response strategies of the different actors determines the form of the induced technological change that ultimately governs the evolution of the coupled climate-socioeconomic system. To clarify the individual roles of the actors, the model is set up in a systems-analytical way, with prescribed control algorithms for the different actors, rather than in the traditional single-actor cost/benefit optimization mode.
The results of the scenario simulations are the following. Business investments in energy and carbon efficiency, induced by government CO2 taxes, yield a significant contribution to emissions reduction. Direct government mitigation actions through carbon taxes are more effective with regard to both emission reductions and economic growth if a significant fraction of carbon taxes are recycled into investments in net carbon efficiency, i.e. into induced technological change. The influence of consumer preferences, often neglected in integrated assessment analyses, is also shown to be very effective in guiding business investments, thereby positively affecting both climate and economic growth.
The simulations of combined parallel control strategies, in which at least two actors simultaneously change their control variables in the same (climate friendly) direction, show that the actors are clearly motivated to cooperate. In relation to the different welfare goals 8 Abstract of the actors and in comparison to the impacts of the individual control decisions, there are always combined strategies, which offer a more effective and reasonable choice than achieved with individual control decisions. The chosen examples are intended as illustrations rather than to provide quantitative predictions.
While all actors are found to exert a significant influence on technological change and the mitigation of global greenhouse warming, their impact on long-term economic growth in all cases is small. The delay in GDP growth incurred over a one-hundred-year period is typically of the order of only one or two years. This result is independent of the details of the (necessarily uncertain) calibration of our model.
