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No country is an island. International cooperation and climate change

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  • Ferrari Massimo,
  • Pagliari Maria Sole,

Abstract

In this paper we explore the cross-country implications of climate-related mitigation policies. Specifically, we set up a two-country, two-sector (brown vs green) DSGE model with negative production externalities stemming from carbon-dioxide emissions. We estimate the model using US and euro area data and we characterize welfare-enhancing equilibria under alternative containment policies. Three main policy implications emerge: i) fiscal policy should focus on reducing emissions by levying taxes on polluting production activities; ii) monetary policy should look through environmental objectives while standing ready to support the economy when the costs of the environmental transition materialize; iii) international cooperation is crucial to obtain a Pareto improvement under the proposed policies. We finally find that the objective of reducing emissions by 50%, which is compatible with the Paris agreement's goal of limiting global warming to below 2 degrees Celsius with respect to pre-industrial levels, would not be attainable in absence of international cooperation even with the support of monetary policy.

Suggested Citation

  • Ferrari Massimo, & Pagliari Maria Sole,, 2021. "No country is an island. International cooperation and climate change," Working papers 815, Banque de France.
  • Handle: RePEc:bfr:banfra:815
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    1. No country is an island: International cooperation and climate change
      by Christian Zimmermann in NEP-DGE blog on 2021-09-14 15:00:18

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    4. Annicchiarico, Barbara & Di Dio, Fabio & Diluiso, Francesca, 2024. "Climate actions, market beliefs, and monetary policy," Journal of Economic Behavior & Organization, Elsevier, vol. 218(C), pages 176-208.
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    More about this item

    Keywords

    DSGE model; open-economy macroeconomics; optimal policies; climate modelling.;
    All these keywords.

    JEL classification:

    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F30 - International Economics - - International Finance - - - General

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