Analysis of Climate Damage Abatement Costs Using a Dynamic Economic Model

Future costs arising from climate change and the transformation of the energy system are investigated using a modified version of the Multi-Actor Dynamic Integrated Assessment Model (MADIAM). A cost-benefit analysis is applied to compute optimal business investment scenarios. The economic core of MADIAM describes an economy driven by business striving to maximise profits by investing in physical and human capital. Profits are continually eroded by wage pressures and competition and can be maintained only by investing in human capital (i.e. productivity), which is thus the main driver of economic growth. Future costs accrue from climate damages and the higher expense of non-fossil fuels, which are used either to mitigate climate change or because of declining fossil resources. The impact of various taxation scenarios on the absolute costs, the cost structure and climate change is examined.