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Optimal climate policies in a dynamic multi-country equilibrium model

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  • Hillebrand, Elmar
  • Hillebrand, Marten

Abstract

This paper develops a dynamic general equilibrium model with an arbitrary number of different regions to study the economic consequences of climate change under alternative climate policies. Regions differ with respect to their state of economic development, factor endowments, and climate damages and trade on global markets for capital, output, and exhaustible resources. Our main result derives an optimal climate policy consisting of an emissions tax and a transfer policy. The optimal tax can be determined explicitly in our framework and is independent of any weights attached to the interests of different countries. Such weights only determine optimal transfers which distribute tax revenues across countries. We infer that the real political issue is not the tax policy required to reduce global warming but rather how the burden of climate change should be shared via transfer payments between different countries. We propose a simple transfer policy which induces a Pareto improvement relative to the Laissez faire solution. A calibrated example quantifies Pareto-improving transfers between rich and poor countries.

Suggested Citation

  • Hillebrand, Elmar & Hillebrand, Marten, 2019. "Optimal climate policies in a dynamic multi-country equilibrium model," Journal of Economic Theory, Elsevier, vol. 179(C), pages 200-239.
  • Handle: RePEc:eee:jetheo:v:179:y:2019:i:c:p:200-239
    DOI: 10.1016/j.jet.2018.11.001
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    Keywords

    Multi-region dynamic general equilibrium model; Climate change; Optimal climate tax; Optimal transfer policy; Pareto improvement;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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