Optimal climate policies in a dynamic multi-country equilibrium model

Abstract

This paper develops a dynamic general equilibrium model with an arbitrary number of different regions to study the economic consequences of climate change under alternative climate policies. Regions differ with respect to their state of economic development, factor endowments, and climate damages and trade on global markets for capital, output, and exhaustible resources. Our main result derives an optimal climate policy consisting of an emissions tax and a transfer policy. The optimal tax can be determined explicitly in our framework and is independent of any weights attached to the interests of different countries. Such weights only determine optimal transfers which distribute tax revenues across countries. We infer that the real political issue is not the tax policy required to reduce global warming but rather how the burden of climate change should be shared via transfer payments between different countries. We propose a simple transfer policy which induces a Pareto improvement relative to the Laissez faire solution.

A dynamic game modeling on air pollution mitigation with regional cooperation and noncooperation

“…Since then, scholars have extended the RICE model, with Z. Yang (2003) using a modified RICE model to explore the cooperative game in climate negotiations. Hillebrand and Hillebrand (2019) further constructed a multiregional dynamic model that considers regional trade in international capital markets. Most game models assume that all countries are cooperative, and recent studies on environment economy systems have added the exploration of noncooperative games (Jaakkola & van der Ploeg, 2019) as well as dynamic stochastic economic models (Y. Cai et al, 2019).…”

Governmental Intervention and Its Impact on Growth, Economic Development, and Technology in OECD Countries

“…However, the damage would be dramatically more significant in non-OECD countries, exceeding 30% of GDP in 2200, in the laissez-faire allocation. A carbon tax will considerably reduce this damage to less than 10% of GDP for the next 200 years [79].…”

“…Hillebrand and Hillebrand [79] show that an optimal climate policy can be implemented either through a uniform global CO2 tax or through an emissions trading system that is globally organized. Therefore, there is a choice to be made about the transfer payments between countries because they share the climate change burden.…”

“…At the end of the simulation period (the year 2215), damages in the laissez-faire regime exceed 20% of world GDP compared to 6.1% in the optimal case. With laissez-faire, countries do not take any action against climate change, and it is also a threat point [79].…”