The green-MKS system: A baseline environmental macro-dynamic model

Abstract

This paper extends the Marx-Keynes-Schumpeter model in Flaschel (2015) to study the social dimension of climate change. Agents are divided between those supporting and those opposing taxing Green House Gas (GHG) emissions. The composition of the population varies according to a continuous-time version of the discrete-choice approach. Conditional to the level of interaction between players, society chooses the respective carbon tax rate. Higher taxes reduce capital accumulation but support the development of energy-saving production techniques. Output growth and employment rates will be higher or lower depending on which effect prevails. Economic activity generates GHG emissions and determines the employment rate, which, in turn, endogenously feedback on environmental sentiments. Lower emissions reinforce sustainable attitudes, while falling employment increases households’ concerns with more “urgent” needs, decreasing support for taxation. Hence, the model is compatible with a positive relationship between environmental attitudes and energy efficiency but not a clear association with output. A sufficiently strong response of attitudes to emissions combined with a “sentiments-autonomous” carbon tax may lead to the disappearance of the equilibrium in which most agents oppose regulation, controlling for multi-stability. Our 3-dimensional system admits endogenous persistent and bounded fluctuations, where the interaction between green attitudes and the macro-economy appears as a novel source of growth-cycle dynamics.