ABC of models for the study of climate policies

Alberto Locarno

No 1530, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper reviews the literature on Integrated Assessment Models (IAMs) and their applications. By augmenting standard econometric models with equations that represent the carbon cycle and its impact on temperature, IAMs can capture the interactions between the economy and the climate system, enabling the assessment of the costs and benefits of policies aimed at reducing CO2 emissions.The main insights afforded by IAMs are that (i) the costs of the policies required to eliminate the climate externality are manageable and would not dramatically reduce global economic growth prospects; (ii) only policies that affect the price of fossil energy sources can bring greenhouse gas emissions to zero, while monetary policy can contribute only marginally; (iii) strategies that set a temperature cap or a specific date for achieving net-zero emissions are suboptimal.

Keywords: climate change; carbon cycle; damage function; externalities; Pigouvian taxes; discount rate (search for similar items in EconPapers)
JEL-codes: E1 O33 O44 Q41 Q54 (search for similar items in EconPapers)
Date: 2026-04
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