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Environmental Macroeconomics

Chapter in book
Authors John Hassler
Per Krusell
Jr. Smith
Published in Handbook of Macroeconomics, Vol. 2 / edited by John B. Taylor and Harald Uhlig
Pages 1893-2008
ISBN 978-0-444-59487-7
Publisher Elsevier
Place of publication Amsterdam
Publication year 2016
Published at Department of Economics
Pages 1893-2008
Language en
Keywords Carbon cycle, Climate change, Climate system, Damages, Discounting, Externality, Growth, Pigou tax
Subject categories Economics, Climate Research


We discuss climate change and resource scarcity from the perspective of macroeconomic modeling and quantitative evaluation. Our focus is on climate change: we build a very simple “integrated assessment model,” ie, a model that integrates the global economy and the climate in a unified framework. Such a model has three key modules: the climate, the carbon cycle, and the economy. We provide a description of how to build tractable and yet realistic modules of the climate and the carbon cycle. The baseline economic model, then, is static but has a macroeconomic structure, ie, it has the standard features of modern macroeconomic analysis. Thus, it is quantitatively specified and can be calibrated to obtain an approximate social cost of carbon. The static model is then used to illustrate a number of points that have been made in the broad literature on climate change. Our chapter begins, however, with a short discussion of resource scarcity—also from the perspective of standard macroeconomic modeling—offering a dynamic framework of analysis and stating the key challenges. Our last section combines resource scarcity and the integrated assessment setup within a fully dynamic general equilibrium model with uncertainty. That model delivers positive and normative quantitative implications and can be viewed as a platform for macroeconomic analysis of climate change and sustainability issues more broadly. © 2016 Elsevier B.V.

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