Designing Industrial Sustainability Policies in the Agent- Based Macro-Economic Framework EURACE

Evidence increasingly suggests that the industrial system is a large contributor to anthropogenic climate change, is increasingly creating resource scarcity, and is generating unmanageable waste to land-fill. To develop more sustainable industrial systems and sustainable societies, policy makers and industry need to better understand how to transform industrial behaviour leveraging on appropriate investment and implementation of technology. The phenomena to be studied originate in classical economic externalities. In recent years, a bottom-up approach to economic analysis, referred to as “agent-based modeling,” has been motivated by new insights on the limitations of traditional economic approaches, as well as computational advances. The key advantage of agent based modeling in this context is to explicitly treat the incentives that face behaviorally realistic agents in empirically credible environments and its ability to take into account behavioural heterogeneity and interactions, which can lead to emergent behaviour which might be very difficult to foresee in an aggregate model. We employ the EURACE agent based macro-economic model and simulator (Cincotti et al., 2010, Raberto et al. 2012) and enrich it to encompass industrial sustainability considerations. In particular, we endow the firms’ production function with an additional raw material input (provided by the environmental agent at costs rising with the demand), and with an additional output representing the creation of waste/emissions. The fiscal policy of the government agent is also enriched to include possible fiscal incentives to the industry to support investment in ecoproductivity enhancement to avoid potential future obligations to pay for mitigation/adaptation to address negative environmental impacts of industry. Preliminary computational experiments show non trivial complex behaviros, where the fiscal incentives to the sustainable transition may have different macroeconomic and environmental outcomes, depending on both the business cycles and the size of the rebound effect of the improved technology. The contribution of this work is then to initiate a new research field into the use of an agent-based macro-economic framework for investigating industrial sustainability and to assist policy makers by providing a framework to better assess policy options for investments and incentive systems to drive sustainability.