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Debt and damages: What are the chances of staying under the 2°C warming threshold?

Author

Listed:
  • Bovari, Emmanuel
  • Lecuyer, Oskar
  • Mc Isaac, Florent

Abstract

In a stock-flow consistent macrodynamic model featuring two crucial endogenous destabilizing channels, debt accumulation and climate change, we perform a sensitivity analysis on four fundamental parameters of the climate and economic systems: (i) the climate sensitivity, (ii) the inertia of the carbon cycle, (iii) the labor productivity growth, and (iv) the share of damages sustained by the capital stock. Our main findings are that there is a mere 0.5% chance of achieving the 2 °C global warming target of the Paris Agreement in a no policy scenario, while a carbon tax, and a carbon tax plus a subsidy to mitigation efforts, increase that probability to approximately 6.5% and 25.6% respectively. We also investigate the trade-off between mitigating climate change damages and staying in a sustainable debt trajectory. While implementing effective climate policies comes at the cost of increasing the debt burden, shifting some of the debt burden to the public sector significantly reduces the chance of overstepping a threshold of unsustainable debt.

Suggested Citation

  • Bovari, Emmanuel & Lecuyer, Oskar & Mc Isaac, Florent, 2018. "Debt and damages: What are the chances of staying under the 2°C warming threshold?," International Economics, Elsevier, vol. 155(C), pages 92-108.
    • Handle: RePEc:eee:inteco:v:155:y:2018:i:c:p:92-108
    DOI: 10.1016/j.inteco.2018.02.002
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    Cited by:

    1. Nelson Amowine & Tomas Balezentis & Zhixiang Zhou & Dalia Streimikiene, 2024. "Transitions towards green productivity in Africa: Do sovereign debt vulnerability, eco‐entrepreneurship, and institutional quality matter?," Sustainable Development, John Wiley & Sons, Ltd., vol. 32(4), pages 3405-3422, August.
    2. Bailly, Hugo & Mortier, Frédéric & Giraud, Gaël, 2024. "Empirical analysis of a debt-augmented Goodwin model for the United States," Structural Change and Economic Dynamics, Elsevier, vol. 70(C), pages 619-633.
    3. Yufeng Chen & Zhitao Zhu, 2022. "Liability Structure and Carbon Emissions Abatement: Evidence from Chinese Manufacturing Enterprises," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 83(2), pages 481-507, October.
    4. Louis Daumas, 2024. "Financial stability, stranded assets and the low‐carbon transition – A critical review of the theoretical and applied literatures," Journal of Economic Surveys, Wiley Blackwell, vol. 38(3), pages 601-716, July.
    5. Florent MCISAAC & Florent Mc ISAAC, 2017. "An Input-Output Analysis: What Would a Low-Carbon Economy for Brazil Mean?," Working Paper f2f77b78-bd3b-4408-b3e9-d, Agence française de développement.
    6. Dafermos, Yannis & Nikolaidi, Maria, 2021. "How can green differentiated capital requirements affect climate risks? A dynamic macrofinancial analysis," Journal of Financial Stability, Elsevier, vol. 54(C).
    7. Ayoub Zeraibi & Magdalena Radulescu & Muhammad Kamran Khan & Muhammad Hafeez & Atif Jahanger, 2024. "Analyzing the linkage between public debt, renewable electricity output, and CO2 emissions in emerging economies: Does the N-shaped environmental Kuznets curve exist?," Energy & Environment, , vol. 35(5), pages 2407-2430, August.
    8. Gourdel, Régis & Monasterolo, Irene & Dunz, Nepomuk & Mazzocchetti, Andrea & Parisi, Laura, 2024. "The double materiality of climate physical and transition risks in the euro area," Journal of Financial Stability, Elsevier, vol. 71(C).
    9. repec:hal:cesptp:hal-04872636 is not listed on IDEAS
    10. Louis Daumas, 2021. "Should we fear transition risks - A review of the applied literature," Working Papers 2021.05, FAERE - French Association of Environmental and Resource Economists.
    11. Tian Zhao & Zhixin Liu, 2022. "Drivers of CO 2 Emissions: A Debt Perspective," IJERPH, MDPI, vol. 19(3), pages 1-18, February.
    12. Éric Herbert & Gaël Giraud & Aurélie Louis-Napoléon & Christophe Goupil, 2023. "Macroeconomic dynamics in a finite world based on thermodynamic potential," Post-Print hal-04872636, HAL.
    13. Jacques, Pierre & Delannoy, Louis & Andrieu, Baptiste & Yilmaz, Devrim & Jeanmart, Hervé & Godin, Antoine, 2023. "Assessing the economic consequences of an energy transition through a biophysical stock-flow consistent model," Ecological Economics, Elsevier, vol. 209(C).
    14. Rémi DE BERCEGOL & Jérémie CAVE & Arch NGUYEN THAI HUYEN, 2018. "Informal Recycling vs municipal Waste Service in Asian cities: Opposition or Integration?," Working Paper 07c154f8-d6a3-4480-907b-1, Agence française de développement.
    15. Benjamin M. Bolker & Matheus R. Grasselli & Emma Holmes, 2021. "Sensitivity analysis of an integrated climate-economic model," Papers 2103.06227, arXiv.org.
    16. Stefan Majer & Simone Wurster & David Moosmann & Luana Ladu & Beike Sumfleth & Daniela Thrän, 2018. "Gaps and Research Demand for Sustainability Certification and Standardisation in a Sustainable Bio-Based Economy in the EU," Sustainability, MDPI, vol. 10(7), pages 1-44, July.

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    Keywords

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    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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