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Aggregated economic damages and the role of dynamic carbon tax under climate change: A dynamic general equilibrium model

Author

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  • Deng, Huai
  • Wu, Xianhua
  • Xu, Hui
  • Zhang, Dawei

Abstract

A rational assessment of the aggregated economic damages and a more effective carbon tax are crucial for climate governance. However, existing studies still under-recognize the utility damages and dynamic carbon taxes. In this study, we construct a multi-regional dynamic general equilibrium model considering both production and utility damages. Then, this paper re-estimates the regional aggregated economic damages reasonably (including utility damages) and compares in detail the role of static carbon tax, dynamic carbon tax and regionally optimal dynamic carbon tax (RCT). We found that: (1) As climate change intensifies, the world will suffer >8 % of production damage and 1 % of utility damage by the end of the 21st century. Of these, the US and China face more pronounced economic damage. (2) If the carbon tax is implemented only in some regions, other regions will have a “free rider” benefit. An environmentally friendly dynamic carbon tax (fast and then slow) would be more effective, giving economies room to adapt to the carbon tax. The risk of exacerbating global inequality needs to be guarded against when using carbon tax. (3) Based on the regional social cost of carbon (R-SCC), implementing RCT is most effective for curbing climate change and achieving warming targets. This paper contributes to improving the understanding of assessing regional economic damage from climate change and recognizing the role of dynamic carbon tax.

Suggested Citation

  • Deng, Huai & Wu, Xianhua & Xu, Hui & Zhang, Dawei, 2024. "Aggregated economic damages and the role of dynamic carbon tax under climate change: A dynamic general equilibrium model," Economic Analysis and Policy, Elsevier, vol. 84(C), pages 1099-1119.
    • Handle: RePEc:eee:ecanpo:v:84:y:2024:i:c:p:1099-1119
    DOI: 10.1016/j.eap.2024.10.025
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    References listed on IDEAS

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    Cited by:

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    3. Deng, Huai & Wu, Xianhua & Xu, Hui & Wu, You & Liang, Xin-Zhong, 2025. "Quantifying aggregated economic damages from “fat-tail” extremes high-temperature events in climate change," Structural Change and Economic Dynamics, Elsevier, vol. 75(C), pages 108-121.
    4. Wang, Yaxian & Wang, Xiaoyu & Baležentis, Tomas & Chi, Yuanying & Streimikiene, Dalia, 2025. "Corrigendum to ‘Disentangling the effects of green finance in reducing CO2 emission from energy systems: Evidence from a novel factor decomposition mechanism’ [EAP Vol 85, March 2025, Pages 1721–1738]," Economic Analysis and Policy, Elsevier, vol. 86(C), pages 1966-1966.

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    JEL classification:

    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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