Macro-financial transition risks along mitigation pathways: evidence from a hybrid agent-based integrated assessment model

Fierro, L.E. ORCID: https://orcid.org/0000-0002-4378-1375, Reissl, S., Lamperti, F., Campiglio, E., Drouet, L., Emmerling, J., Kremer, E., & Tavoni, M. (2024). Macro-financial transition risks along mitigation pathways: evidence from a hybrid agent-based integrated assessment model. Research Square 10.21203/rs.3.rs-5111841/v1.

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Abstract

Although the case for a swift climate transition is clear, its macro-financial viability remains uncertain. To shed light on the macroeconomic and financial response to deep mitigation trajectories controlled by carbon pricing, we integrate a process-based integrated assessment model into a macroeconomic agent-based model. The hybrid framework allows translating energy systems transformations into macro-financial outcomes at business cycle frequency and volatility. The results reveal that rapid transitions induced by fast-growing carbon prices significantly impact unemployment, inflation, and income distribution. Stabilization policies reduce these economic fluctuations, though not completely so in 1.5°C compatible scenarios. Our paper emphasizes the need for coordinating climate and macroeconomic policy during decarbonization. Additionally, it showcases how model integration can lead to a better understanding of the economic implications of low-carbon futures.

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