This article is about a serious attempt to consider climate change in a traditional economic model. Where does the dystopian part come in? Well, it sounds like the model suggests we are not going to innovate our way out of the consequences of climate change.

For these reasons, we develop the Dystopian Schumpeter meeting Keynes (DSK) model, which is the first attempt to provide a fully-fledged agent-based integrated assessment framework. It builds on Dosi et al. (2010, 2013, 2016) and extends the Keynes+Schumpeter (K+S) family of models, which account for endogenous growth, business cycles and crises. The model is composed by heterogeneous firms belonging to a capital-good industry and to a consumption-good sector. Firms are fed by an energy sector, which employ dirty or green power plants. The production activities of energy and manufacturing firms lead to CO2 emissions, which increase the Earth surface temperature in a non-linear way as in Sterman et al. (2013). Increasing temperatures trigger micro stochastic climate damages impacting in a heterogeneous way on workers’ labour productivity, and on the energy efficiency, capital stock and inventories of firms.

The DSK model accounts both for frequent and mild climate shocks and low-probability but extreme climate events. Technical change occurs both in the manufacturing and energy sectors. Innovation determines the cost of energy produced by dirty and green technologies, which, in turn, affect the energy-technology production mix and the total amount of CO2 emissions. In that, structural change of the economy is intimately linked to the climate dynamics. At the same time, climate shocks affect economic growth, business cycles, technical-change trajectories, green-house gas emissions, and global temperatures…

Simulation results show that the DSK model is able to replicate a wide array of micro and macro-economic stylized facts and climate-related statistical regularities. Moreover, the exploration of different climate shock scenarios reveals that the impact of climate change on economic performances is substantial, but highly heterogeneous, depending on the type of climate damages. More specifcally, climate shocks to labour productivity and capital stocks lead to the largest output losses and the highest economic instability, respectively. We also
find that the ultimate macroeconomic damages emerging from the aggregation of agent-level shocks are more severe than those obtained by standard IAMs, with the emergence of tipping-points and irreversible catastrophic events.