Assessing the Macroeconomic Effects of IPCC Scenarios: Mitigation, Adaptation, and Carbon Sinks

We develop a multi-region integrated assessment model with different energy inputs to map carbon taxation policies into three IPCC Representative Concentration Pathways for the 21st century: RCP2.6, RCP4.5, and RCP8.5. Our contribution is threefold. First, we focus on a small open economy that features key differences vis-à-vis the global economy. Second, we assess the role of forests as carbon sinks, highlighting their relevance for the transition towards a low-carbon economy. Third, we explicitly model (local) adaptation and adaptation costs to quantify their importance in the transition subject to a global climate mitigation policy. We find that the global welfare effects of Paris Agreement-aligned RCP2.6 are slightly negative relative to the other scenarios. However, for a small open economy more vulnerable to climate change like Portugal, welfare gains of RCP2.6 may be sizable, and net zero emissions could be attained by mid-century. Importantly, adaptation policies are a powerful tool to enhance welfare at the local level for any given global tax policy. We also find a strong case for subsidizing carbon sequestration by forests.