An Agent-Based Approach to Integrated Assessment Modelling of Climate Change

There is an ongoing discussion concerning the relationship between social welfare and climate change, and thus the required level and type of measures needed to protect the climate. Integrated assessment models (IAMs) have been extended to incorporate technological progress, heterogeneity and uncertainty, making use of a (stochastic) dynamic equilibrium approach in order to derive a solution. According to the literature, the IAM class of models does not take all the relationships among economic, social and environmental factors into account. Moreover, it does not consider these interdependencies at the micro-level, meaning that all possible consequences are not duly examined. Here, we propose an agent-based approach to analyse the relationship between economic welfare and climate protection. In particular, our aim is to examine how the decisions of individual agents, allowing for the trade-off between economic welfare and climate protection, influence the aggregated emergent economic behaviour. Using this model, we estimate a damage function, with values in the order 3% - 4% for 2 degrees C temperature increase and having a linear (or slightly concave) shape. We show that the heterogeneity of the agents, technological progress and the damage function may lead to lower GDP growth rates and greater temperature-related damage than what is forecast by models with solely homogeneous (representative) agents.