Climate change policy under spatial heat transport and polar amplification

This chapter is, to our knowledge, the first in climate economics to consider the combination of spatial heat transport and polar amplification. We simplified the problem by stratifying the Earth into latitude belts and assuming, as in North et al. (1981), that the two hemispheres were symmetric. Our results suggest that it is possible to build climate economic models that include the very real climatic phenomena of heat transport and polar amplification, and still maintain analytical tractability. We demonstrate the importance of heat transfer and polar amplification in the welfare analysis of climate change, and in particular on the social price of the climate change externality. Furthermore, we show that the effect of heat transfer and polar amplification on climate policy depend upon the interaction of climate component dynamics with the distribution of welfare weights, population, and productive capacities across latitudes. We discuss optimal fossil fuel taxes in a competitive environment with income effects and show that optimal taxes have a spatial structure and are dependent on each latitude’s output. In addition, we characterize the interactions between spatial transport phenomena and the competitive equilibrium price path of tradable permits. Using general power utility functions, we show that an increase in the coefficient of relative risk aversion will reduce the social price of the climate externality.