Modelling the «global economy – global climate» system using the optimization and system$dynamic approaches

Economic & mathematical methods and models

Climate-economy models (particularly, Integrated Assessment models) are important tools in economics of climate change. We have analyzed the optimization and system-dynamic approaches to climate-economy modelling. The first approach, currently the most widespread, implies defining the relevant model as a dynamic optimization problem, while the second one can ultimately be reduced to (usually numerical) integration of some dynamic system. We have proposed a dynamic model of the «global economy – global climate» system with three state variables: capital, global carbon intensity, and global mean surface air temperature increase above the pre-industrial level (temperature). The model allows for the regimes of endogenous carbon intensity reduction. The capital depreciation rate is endogenous as well, increasing with temperature. We have performed numeric simulations with this Integrated Assessment model under «business-as-usual» scenario, and under conditions of globally coordinated mitigation policies. We have evaluated the discounted utility of consumption for several non-optimal solutions. Simulation results suggest that, as opposed to the formally optimal solution corresponding to the «business-as-usual» scenario with no climate policy, solutions with minor utility reduction caused by moderate investment in endogenous global carbon intensity reduction might be quite efficient in achieving mitigation targets. The analysis performed provides an argument supporting «moderately suboptimal» solutions as a viable alternative to formally «first-best» optimal solutions in certain real-world situations. We conclude with a corollary about the good prospects for applying system-dynamic models in economics of climate change.