Modelling the impacts of a national carbon tax in a country with inhomogeneous regional development: an actor-based system-dynamic approach

Different countries of the world are affected differently by the adverse impacts of anthropogenic climate change. For a large country consisting of several regions with different geographical conditions, the direct geographical impacts of climate change may differ significantly. Given the inhomogeneous regional economic development typical for many large countries already for the present climate, this suggests that regional economic disparities may increase even further as global warming develops. It is thus important that the impacts of climate mitigation policies are assessed not only on global and national levels, but also on the regional level. The key tool for assessing the efficiency of climate mitigation policies and their impacts are Integrated Assessment models (IAMs), i.e. dynamic models of the coupled climate - socioeconomic system. The family of IAMs described in the present paper represent extensions and modifications of a set of actor-based system-dynamics models reported earlier in Hasselmann K. (2013), Detecting and responding to climate change, Tellus B 65, 20088, http://dx.doi.org/10.3402/tellusb.v65i0.20088 (open access). The models focus on the strategies of key decision-making aggregate economic actors (often pursuing conflicting goals) that jointly govern the dynamic evolution of the socio-economic system. We start from a global IAM in which both fossil-fuel-based capital and renewable-energy-based capital determine the production function. We compare a business-as-usual scenario (no mitigation policy) with various mitigation scenarios with different global carbon tax rates. The revenues from the carbon tax in the mitigation scenarios are recirculated into the economy in the form of investments in renewable-energy-based capital. We explore both the case of constant productivity of renewable-energy-based capital and the case with endogenous improvement of renewable-energy productivity through learning-by-doing effects. The model simulations demonstrate that efficient mitigation policies are feasible with readily affordable costs. From this we develop a regionalized IAM along the same methodological lines. We consider a large country composed of two regions characterized by different climates and levels of economic development. This is coupled to large residual "country" representing the "rest of the world". It is assumed that a harmonized carbon tax is imposed in both regions of the country and also in the rest of the world. We explore to which extent the transfer of money from carbon tax revenues between the two regions undertaken by a national government can moderate regional disparities in economic development and climate change impacts. The research leading to these results has received funding from the European Community's Seventh Framework Programme under Grant Agreement No. 308601 (COMPLEX).