How carbon pricing affects multiple human needs: An agent-based model analysis

Abstract

Climate policy is urgently needed to reduce emissions, but must also be evaluated in regard to its impact on human quality of life. To identify policy approaches that are able to achieve effective mitigation together with high levels of well-being, multiple human needs must be taken into account. To this end, we present an agent-based model that is able to describe the interaction between various economic sectors on the supply-side and individuals with heterogeneous incomes and needs on the demand-side. Individuals make choices under both income and time constraints; the latter being needed for non-market activities and time-intensive forms of consumption such as low-carbon modes of transport. The following climate policy instruments are considered: a carbon tax, permit trading, direct regulation, and investments in low-carbon infrastructure. Impacts are analyzed in regard to three different types of mitigation: avoid, shift, and improve. Results show that to achieve emission reductions together with high levels of well-being, carbon pricing is best combined with effective improvements of low-carbon infrastructure; revenue recycling should be progressive; and unnecessary abatement costs should be avoided. A comparison is provided with traditional formulations of social welfare.