The motivation comes from a growing catalogue of criticisms aimed at mainstream integrated assessment models, or IAMs. These tools, which feature heavily in IPCC reports and inform negotiations under the UNFCCC, have long been attacked for the extraordinary sensitivity of their results to how damage functions are specified. Estimates of the social cost of carbon can swing dramatically depending on those curves, yet their empirical foundations are thin and their inner workings opaque. Because the damage function is aggregated, researchers cannot trace how a hotter world disrupts specific macroeconomic mechanisms, test individual assumptions, or validate particular channels of harm. FRIDA’s designers set out to make every pathway visible.

The new module rests on four conceptual pillars drawn from economics rather than climate science alone. It is Schumpeterian, meaning that innovation and creative destruction drive growth from within the model rather than arriving as an exogenous trend. It operates in disequilibrium, abandoning the equilibrium assumptions that most IAMs inherit from neoclassical theory and that the authors argue are inconsistent with the deep uncertainty and market failures surrounding climate change. All growth components are endogenous, so productivity, investment and employment emerge from the model’s own feedback loops. And the financial architecture is stock-flow consistent, a bookkeeping discipline ensuring that every asset in the simulated economy is matched by a liability, so that money, debt and credit creation are tracked coherently through every transaction.

Structurally, the economy module contains 761 equations and 33 state variables organised into seven interconnected submodules: circular flow, finance, innovation, government, employment, GDP and inflation. The circular flow simulates production and consumption between households and firms, with income streams from labour and ownership tracked separately because workers and asset owners behave differently, saving and spending at different rates. Firms’ checking accounts receive consumption expenditure and pay out wages, rent and profits. On its own, this circuit would settle into a stable equilibrium; growth enters through bank lending and government spending, which the other submodules govern.

The finance submodule is where climate change first bites in a distinctly monetary way. A single aggregate banking sector extends credit, classifying new loans as performing, nonperforming or exploratory, the last category funding innovative ventures with transformative potential. Lending standards tighten as default rates rise, and the failure rate on new loans is dynamically adjusted for economic conditions and for the surface temperature anomaly itself: as global temperatures climb, extreme weather raises the probability that new investments fail. Sea level rise can sink even otherwise sound coastal businesses, innovation renders old assets obsolete and their loans with them, and interest rate hikes can push any class of loan into default. Each of these channels is explicit, parameterised against empirical literature, and traceable through the model’s stock and flow diagrams.

Innovation, in the Schumpeterian tradition, is a double-edged force. Exploratory loans and incumbent firms’ research and development jointly determine productivity growth, which expands the economy’s potential over the long run. But creative destruction displaces existing investments and workers in the short term, and firms become more inclined to innovate when their cash reserves stagnate, tying the pace of technological change to the business cycle. Realised labour productivity is then further eroded by heat: the model divides global work into high, low and no exposure classes across agriculture, industry and services, with outdoor strenuous labour suffering the most as temperatures rise, and the sectoral composition of the economy shifting with income as it does in observed development patterns.

The government submodule aggregates the world’s fiscal and monetary authorities. Tax revenue from wages, profits and rents funds public investment, consumption and transfers, with spending constrained by the debt-to-GDP ratio and deficits issuing public debt to the banking sector. Central banks adjust a policy rate to steer inflation toward two percent and unemployment toward five percent, while risk premia on private and government borrowing rise with perceived default risk. Transfers are countercyclical, expanding with unemployment and with the child and retiree cohorts tracked by FRIDA’s demographics module, and as climate losses mount, a growing share of public expenditure shifts from investment toward repairs and maintenance.

Calibration against historical data from 1980 to 2023, drawn from the World Bank, IMF, OECD, WID and ILO, shows the model producing macroeconomic dynamics broadly consistent with observations, including endogenous business-cycle fluctuations visible in GDP, unemployment and the labour share of income. The authors are careful about what these cycles mean: they arise from a single structural mechanism, the interaction of innovation and finance, and cannot reproduce specific historical downturns such as the 2009 banking crisis or the 2020 pandemic, which the model deliberately excludes as exogenous shocks. To confront uncertainty honestly, the team ran a 100,000-member ensemble using Sobol sequence sampling across parameter ranges, reporting medians and 67 and 95 percent confidence intervals through 2150 rather than seductive single-line forecasts.

The ensemble results carry a sobering message. Median real output continues to grow through the end of the century, but the growth decelerates as rising temperatures raise loan failure rates, tighten lending standards and widen the gap between safe and risky interest rates, directly raising the cost of financing investment. Unemployment climbs under the combined pressure of climate-driven defaults, productivity-driven displacement, demographic contraction and sticky wages, and the resulting transfer burdens push government debt upward, which in turn raises interest costs and squeezes discretionary spending. Within the 95 percent interval, some parameterisations consistent with historical data produce outright declines in real output, a risk that aggregate damage functions would struggle to surface.

The authors acknowledge the trade-offs of their approach: global aggregation masks local impacts, the disequilibrium framework forgoes formal policy optimisation, and calibration inevitably attributes historical volatility to the model’s single endogenous cycle mechanism. Yet they argue the payoff is a transparent, modifiable platform, freely available on GitHub, in which policy choices interact with evolving financial, fiscal and demographic pressures rather than being assessed in isolation. Whether a carbon tax lands in a recession or an expansion, how transition funding strategies compare, and how a disorderly transition might trigger system-wide financial distress are all questions the model is built to explore, and ones that the equilibrium, finance-free IAMs of the past generation could not even ask.

Subject of Research: A stock-flow consistent, disequilibrium economy module for the FRIDA v2.1 integrated assessment model of climate-economy interactions

Article Title: Schumpeterian disaggregation and integrated assessment: An endogenous, stock-flow consistent economy in disequilibrium for FRIDA v2.1

Article References: Schumpeterian disaggregation and integrated assessment: An endogenous, stock-flow consistent economy in disequilibrium for FRIDA v2.1. (n.d.). https://doi.org/10.5194/gmd-19-9411-2026

Image Credits: AI Generated

DOI: 10.5194/gmd-19-9411-2026

Keywords: integrated assessment models, climate economics, FRIDA v2.1, stock-flow consistency, Schumpeterian innovation, financial fragility, endogenous growth, business cycles, public debt, unemployment, climate damage functions, ensemble simulation