Warming the MATRIX: a Climate Assessment under Uncertainty and Heterogeneity

50 Pages Posted: 11 May 2023

See all articles by Davide Bazzana

Davide Bazzana

University of Brescia - Department of Economics and Management; Fondazione Eni Enrico Mattei (FEEM)

Massimiliano Rizzati

Fondazione Eni Enrico Mattei

Emanuele Ciola

Fondazione Eni Enrico Mattei (FEEM), Milan; University of Brescia - Department of Economics and Management

Enrico Maria Turco

Catholic University of Milan; University of Amsterdam

Sergio Vergalli

University of Brescia - Department of Economics; Fondazione Eni Enrico Mattei (FEEM), Milan

Date Written: May 11, 2023

Abstract

This paper explores the potential impacts of climate change and mitigation policies on the Euro Area, considering the uncertainty and heterogeneity in both climate and economic systems. Using the MATRIX model, a multi-sector and multi-agent macroeconomic model, we simulate various climate scenarios by employing different carbon cycle models, damage functions, and marginal abatement curves found in the literature. We find that heterogeneous climate damages amplify both the magnitude and the volatility of GDP losses associated with global warming. By the end of the century, we estimate that assuming homogeneous shocks may underestimate the effects of climate change on aggregate output by up to one-third. Moreover, we find that the speed and feasibility of a low-carbon transition crucially depend on (i) the stringency of emission reduction targets, which determine the level of a carbon tax, and (ii) the rate of technological progress, which influences the shape of the abatement cost curve.

Keywords: Energy Sector, Agent-Based Models, Macroeconomic Dynamics, Climate change, Climate Policy, Emission Abatement

JEL Classification: C63, Q52, Q58

Suggested Citation

Bazzana, Davide and Rizzati, Massimiliano and Ciola, Emanuele and Turco, Enrico Maria and Turco, Enrico Maria and Vergalli, Sergio, Warming the MATRIX: a Climate Assessment under Uncertainty and Heterogeneity (May 11, 2023). FEEM Working Paper No. 09, Available at SSRN: https://ssrn.com/abstract=4445332 or http://dx.doi.org/10.2139/ssrn.4445332

Davide Bazzana (Contact Author)

University of Brescia - Department of Economics and Management ( email )

Contrada Santa Chiara, 50
BRESCIA, BS 25122
Italy

Fondazione Eni Enrico Mattei (FEEM) ( email )

C.so Magenta 63
Milano, 20123
Italy

Massimiliano Rizzati

Fondazione Eni Enrico Mattei ( email )

Italy

Emanuele Ciola

Fondazione Eni Enrico Mattei (FEEM), Milan ( email )

Corso Magenta 63
20123 Milan
Italy

University of Brescia - Department of Economics and Management ( email )

Contrada Santa Chiara 50
BRESCIA, BS 25122
Italy

Enrico Maria Turco

Catholic University of Milan ( email )

1 Largo A. Gemelli
Milano (Milan), MI Milano 20123
Italy

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Sergio Vergalli

University of Brescia - Department of Economics ( email )

Via San Faustino 74B
Brescia, 25122
Italy

Fondazione Eni Enrico Mattei (FEEM), Milan ( email )

Corso Magenta 63
20123 Milan
Italy

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