Endogenous economic structure, climate change, and the optimal abatement path

Hua Liao and Huiying Ye

Structural Change and Economic Dynamics, 2023, vol. 65, issue C, 417-429

Abstract: This paper endogenizes economic structure in Nordhaus's standard DICE model, and builds a dynamic intertemporal optimization model to determine long-term CO2 mitigation policy. Two basic macroeconomic sectors that vary in carbon intensity and suffer different damage from climate change are incorporated: one producing consumer goods, and another producing capital goods. The model finds a bidirectional interaction between climate change and economic structure. Climate change is able to reverse structure transition by decreasing investment rate. Meanwhile, economic structure evolution affects the choice of policies for managing climate change. Compared to the standard DICE model, our results show that we are likely to face a more severe climate situation; therefore, deeper mitigation efforts are called for, which requires investing an average of 3.2% of GDP per year for 2 °C warming goal. Mitigation efforts can become more effective for the economy as economic structure evolves and evokes future investment response, which will be determined not only by the normal intertemporal trade-off between present-day and future consumption, but also by another trade-off between high and low carbon-intensive goods.

Keywords: Economic structure; Dynamic intertemporal optimization; Integrated assessment modelling; Abatement pathway; Investment rate (search for similar items in EconPapers)
JEL-codes: O41 Q01 Q54 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:streco:v:65:y:2023:i:c:p:417-429

DOI: 10.1016/j.strueco.2023.03.014

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