The welfare implications of climate change policy

The response to three different climate change policies is measured within a general equilibrium model of world output, technological change, greenhouse gas emissions, and climate-driven changes in productivity. The proposed policies, including an approximation to the Kyoto protocol, are shown to differ greatly in how they mitigate climate change, support economic growth, and allocate rents across generations. Benefits of alternative policies, relative to the status quo, do not necessarily accrue to the generations that bear the costs. The results also show that the chosen rent distribution rule has a profound effect on policy evaluation. In particular, policies which allocate rents on a per-capita basis are shown to be systematically welfare-preferred to situations where emissions rights are grandfathered to emitting firms. This implies that both the optimal level of emissions and the welfare cost of reaching a given target of emissions or atmospheric concentration would be lower under a per-capita allocation of emissions permits or carbon tax revenues.