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ABC of models for the study of climate policies

Author

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  • Alberto Locarno

    (Bank of Italy)

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.

Suggested Citation

  • Alberto Locarno, 2026. "ABC of models for the study of climate policies," Temi di discussione (Economic working papers) 1530, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1530_26
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2026/2026-1530/en_tema_1530.pdf
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    Keywords

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    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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