Economics Research Seminar

"The Legacy of Policy Inaction in Climate-Growth Models"

To better understand the workings of a broad class of climate-growth models, we analyze a simplified version of DICE through the lens of growth theory. We analytically show that this model exhibits a continuum of saddle-point stable steady states. Hence, initial conditions of stock variables, notoriously difficult to calibrate, matter for the long-run economic and climate outcomes. However, we also demonstrate that a mis-specified initial stock of capital has a significantly smaller impact than a mis-specified initial CO2 stock. These novel insights have important implications for the consequences of delayed climate policy implementation and the optimal carbon tax. We employ a calibrated model, solved numerically for the big transition, to show how a postponement of optimal climate policy into the future leads to a higher peak temperature and a higher steady-state temperature. The findings carry over to a large set of (analytical and numerical) IAMs. The simple DICE, augmented by the FAIR carbon model, exhibits a continuum of steady states over time horizons spanning several centuries. Peak temperature as well as long-run temperature depend on initial conditions, a finding that is also confirmed for DICE-2023. We also show that the SCC-to-GDP ratio is largely constant, despite transitional dynamics. However, its level depends on the timing of optimal policy implementation.