Carbon Pricing and Global Warming: A Stock-flow Consistent Macro-dynamic Approach

To what extent can a worldwide carbon pricing foster the transition towards a low-carbon economy and help mitigate the effects of global warming? We address this question using a stock-flow consistent, financial and non-linear macrodynamics with uncertainty, calibrated for the world economy. We find that the upper-bound of the carbon pricing corridor advocated in the Stern-Stiglitz Commission, when implemented together with additional public subsidies on abatement costs in the private sector, succeeds in driving the economy into the neighbourhood of a balanced growth path. With high probability, this would make it possible to cap the average Earth temperature deviation at below +2.5°C by the end of this century. Absent such strong public involvement, and provided it be captured through a sufficiently convex damage function, the impact of climate change on gross output and capital appears to be powerful enough to almost surely pull the state of the world economy towards a debt-deflationary field, potentially leading to forced degrowth in the second half of the twenty-first century. Such a flow of trajectories is characterised on shorter time scales by low growth, the rise of unemployment as well as private debt, low inflation and interest rates, together with a declining wage share.