Climate Policies with Burden Sharing: The Economics of Climate Financing

Climate control needs have reached momentum. While scientists call for stabilizing climate and regulators structure climate change mitigation and adaptation efforts around the globe, economists are concerned with finding proper and fair financing mechanisms. In an overlapping-generations framework, Sachs (2014) solves the climate change predicament that seems to pit today’s against future generations. Sachs (2014) proposes that the current generation mitigates climate change financed through bonds to remain financially as well-off as without mitigation while improving environmental well-being of future generations through ensured climate stability. This intergenerational tax-and-transfer policy turns climate change mitigation into a Pareto improving strategy. Sachs’ (2014) discrete model is integrated in contemporary growth and resource theories. The following article analyzes how climate bonds can be phased-in, in a model for a socially optimal solution and a laissez-faire economy. Optimal trajectories are derived partially analytically (e.g., by using the Pontryagin maximum principle to define the optimal equilibrium), partially data driven (e.g., by the use of modern big market data), and partially by using novel cutting-edge methods – for example, nonlinear model predictive control (NMPC), which solves complex dynamic optimization problems with different nonlinearities for infinite and finite decision horizons. NMPC will be programed with terminal condition in order to determine appropriate numeric solutions converging to some optimal equilibria. The analysis tests if the climate change debt adjusted growth model stays within the bounds of a sustainable fiscal policy by employing NMPC, which solves complex dynamic systems with different nonlinearities.