Over the past two decades, carbon pricing has been a primary tool used by policymakers in trying to reduce emissions and accelerate the green energy transition, and so a critical assessment of its policy potential and limitations is essential for advancing to a low-carbon economy.
Traditional modeling frameworks often fail to capture the real-world impacts of such policies due to oversimplified assumptions. Agent-Based Models (ABMs) offer a more flexible and realistic approach for assessing both the potential and limitations of carbon pricing and related interventions, via statistical simulation of how individual agents collectively generate macroeconomic outcomes.
- ABMs provide a probabilistic understanding of future scenarios. They allow policymakers to assess which policies are more likely to achieve desired outcomes and which may risk significant failures, rather than relying on single-point predictions.
- Carbon pricing alone is likely to be insufficient to reach climate targets. An ABM calibrated to the U.S. suggests that even progressive and steep carbon pricing would not be enough to be in line with the Paris Agreement objectives of limiting warming to 2ºC, though it also suggests carbon pricing makes innovation somewhat more likely and supports higher long-term growth.
- Policies that directly stimulate agents to change industrial strategies and seek to break technological lock-in are likely to be more desirable and effective than broad carbon pricing alone.
- Integrated micro-macro policy approaches are important. ABMs enable analysis of both macro- and microeconomic distributional impacts, helping policymakers identify unintended effects (such as job displacement or inflationary pressures) and design more targeted, sustainable policy mixes.
Environmental policies have broad and uneven effects across sectors, influencing employment, inflation, and public finances—all areas directly relevant to Ministries of Finance. Ensuring a fair and effective low-carbon transition requires Ministries to anticipate economic and social asymmetries and to look beyond the usual macro-level policy levers.
To address these challenges, Ministries of Finance can use ABMs to strengthen their capacity to analyze both the causal mechanisms and probability of distributional effects, moving beyond average impacts to consider risks at the margins. The current ABM is being calibrated to a developing country context (Brazil), and future work should expand its scope to include the economy–temperature feedback, a more heterogenous industrial base, detailed labor markets, and multiple countries in a global set-up.
Keywords
carbon pricingdata-drivendistributional consequencesmacroeconomic indicatorsmodels
