We employ an agent-based integrated assessment model to study the likelihood of transition to green, sustainable growth in presence of climate damages. The model comprises heterogeneous fossil-fuel and renewable plants, capital- and consumption-good firms and a climate box linking greenhouse gasses emission to temperature dynamics and microeconomic climate shocks affecting labour productivity, capital stock and the energy demand of firms. Once climate damages are accounted for, the likelihood of a green transition depends on the damage function employed. In particular, aggregate and quadratic damage functions overlook the impact of climate change on the transition to low-carbon technologies; to the contrary, more realistic micro-level damages are found to deeply influence the chances of a transition, with shocks to energy efficiency hampering shifts in the energy mix.

Further, there is ample evidence that aggregate climate damages are much larger of those usually reported in the literature, thereby calling for prompt policy intervention. We run a series of policy experiments on carbon (fossil fuel) taxes and green subsidies. We find that the effectiveness of such market-based instruments depends on the different channels climate change affects the economy through, and complementary policies might be required to avoid carbon-intensive lock-ins

Prof. Andrea ROVENTINI
Scuola Superiore Sant'Anna, Pisa

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Prof. Domenico DELLI GATTI
Università Cattolica del Sacro Cuore