The political economy of mitigation and adaptation

Abstract

In this paper, we acknowledge that the mitigation of and adaptation to climate change have differential fiscal impacts. Whereas mitigation typically raises fiscal revenues, adaptation is costly to the taxpayer and to a greater extent the more distortionary the tax system is. In an OLG model with majority voting, we analyze how the choices of mitigation and adaptation are distorted under a lump-sum and a distortionary income tax regime. We find that whenever emissions and adaptation exhibit stock characteristics, the levels of mitigation and adaptation are chosen inefficiently low in the political equilibrium under lump-sum taxation. By contrast, the political equilibrium may entail inefficiently high mitigation or inefficiently high adaptation (but not both simultaneously) if the tax system is distortionary.A calibration of our model to the German economy shows that both mitigation and adaptation can be expected to be inefficiently low in the political equilibrium. Furthermore, the standard assumption of a lump-sum tax system when analyzing mitigation and adaptation is found to underestimate the loss in utilitarian welfare relative to a distortionary tax system, although mitigation levels are generally higher under the latter regime. JEL-Classification: D72, D78, H21, H23, Q58Keywords: Adaptation, Mitigation, Political Economy, Majority Voting, OLG, Environmental Taxes * We thank Kelly de Bruin, Jurate Jaraite-Kazukauski, Thomas Sterner and seminar participants at the University of Umeå for valuable comments and suggestions. Wolfgang Habla acknowledges the generous financial support from the FORMAS research program COMMONS.

Games with Adaptation and Mitigation

“…Many recent publications [29][30][31][32][33][34][35][36][37][38][42][43][44][45][46] explore various economic, political, financial, welfare, and regional aspects of strategic interplay between mitigation and adaptation. The majority of related papers tend to favor mitigation versus adaptation for various relevant (and not-so-relevant) reasons.…”

Green Technology Policies Versus Carbon Pricing: An Intergenerational Perspective

“…it does not consider potential feedbacks from voting behavior (i.e., outcomes) to economic decision-making. For example, Habla and Rieder (2017) show that the chosen level of mitigation in a political equilibrium with a distortionary tax system may be inefficiently high. Extending our equilibrium concept to political economy considerations that may affect, for example, the menu of available policy options is an intriguing question for future research.…”

Are Climate Change Policies Politically Costly?

“…Although price increases for oil and gas prices matter to all economic agents, they tighten the budget constraints especially for the poor. This regressivity is a common argument against CCPs and a source of political opposition (Metcalf, 2009;Habla and Roeder, 2017;Goulder et al, 2019). While certain instruments can be designed in a progressive manner, this is not applicable to all types of measures.…”