Conference Agenda

This paper analyzes the implications of binding constraints to material economic growth when humanity is still innovative. We first focus on a modified Ramsey growth model with constant population and endogenous labor choice. When production is constrained, increasing labor productivity translates into labor reductions and the emergence of a leisure economy. The factor income shares are dominated by the scarce (constraining) production factor – energy or a limited natural resource – which we denote also as Baumol’s Energy Cost Disease. We then extend the model for endogenous population growth. While our finding on the emergence of a leisure economy hold, the implications on fertility are ambiguous: on the one hand, children become – like leisure – an increasingly important source of utility when production is constrained; on the other hand population growth reduces per capita utility further. Calibrating our model to the global economy for 1950–2021, we illustrate the quantitative effects for the next four centuries. Population growth is reduced already in anticipation of a resource-constrained economy. Per capita growth diminishes under an average utilitarian welfare function and becomes negative under a total utilitarian welfare function when the resource constraint becomes binding.

We develop a dynamic model of energy use where the energy system relies on three

primary sources: a ’dirty’ fossil resource, a ’clean’ fossil resource that requires some

specific abatement device such as carbon capture and storage (CCS), and a carbon-free

renewable energy. The cumulative amount of carbon that can be emitted is limited

by a given carbon budget. We also account for adaptation measures that can increase

the carbon budget by making society more tolerant to the effects of climate change,

but this comes at a cost. Therefore, we make the carbon budget endogenous and

dependent on the adaptation effort. Within this framework, we study the trade-offs

between mitigation (through energy substitutions and abatement) and adaptation to

relax the climate constraint imposed by the carbon budget. We found that without

CCS technology, the economy will either deplete all of its fossil fuel reserves or leave

some of them unused, which highlights the importance of managing stranded assets

in climate policy. Adaptation measures are only taken once carbon concentrations

reach a minimum tolerance level for society. On the other hand, with the use of CCS

technology, the economy should start implementing it as soon as it begins adapting.

Over time, both abatement and adaptation efforts increase until the economy reaches

a point where it prefers to fully abate carbon emissions rather than investing further

in adaptation. We call this point the maximum adaptation frontier.

The cost benefit analysis of a project with impact on greenhouse gas emissions requires the inclusion of the present value of the resulting climate damage, whether incurred or averted. This typically involves the calculation of the present value of the social cost of carbon, using the prevailing risk-free social discount rate. However, this approach is insufficient when a project's greenhouse gas emissions are contingent upon economic activity. There is no obvious way to take this into accounting by adding a risk premium to the social discount rate, as is usually done using the consumption based capital asset pricing model. We first illustrate this issue by estimating the associated error, using a modified version of DICE that accounts for parameters uncertainty. Subsequently, we introduce an alternative approach, termed "stress discounting method," in which projects are evaluated across several risk-free scenarios. We demonstrate how this approach can enhance the cost-benefit analysis of green investment projects with illustrations related to carbon offsets and adaptation.

Interactions of human societies with the climate system and ecosystems in the biosphere caused the twin-crisis of climate change and biodiversity loss. In this paper we contribute to addressing the challenge of evaluating socially optimal climate policy in a world with atmosphere-biosphere interactions by combining the work of two influential economists: Partha Dasgupta and Bill Nordhaus. Specifically, we include non-linear natural capital dynamics from the Dasgupta Review on the Economics of Biodiversity in a recently updated DICE model to study the effects on the optimal level of natural capital, economic growth, the social cost of carbon and the social value of nature. Our results, which are robust to changes in key parameter specifications, indicate the need for more ambitious climate policy in order to limit damages to natural capital and ecosystem services. We also highlight the role of reducing natural resource use and waste in order to let ecosystems regenerate and foster the creation of co-benefits for climate mitigation through nature-based carbon removal.