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Optimal Climate Policies in a Dynamic Multi-Country Equilibrium Model

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  • Hillebrand, Marten
  • Hillebrand, Elmar

Abstract

This paper develops a dynamic general equilibrium model with an arbitrary number of different regions to study alternative climate policies and the consequences of climate change. Countries differ with respect to their state of economic development, factor endowments, and climate damages and trade on global markets for capital and exhaustible resources. Our main theoretical result derives an optimal climate policy consisting of an optimal emissions tax and an optimal transfer policy. The optimal climate tax can be determined explicitly in our framework and is independent of any weights attached to the interests of different countries. These weights only determine optimal transfers which distribute tax revenues across countries. We infer that the real political issue is not the amount of taxation required to reduce global warming but how the burden of climate change should be shared via transfer payments between different countries. To offer some guidance on this matter, we conduct a numerical simulation study which analyzes the optimal transfers between OECD and Non-OECD countries.

Suggested Citation

  • Hillebrand, Marten & Hillebrand, Elmar, 2016. "Optimal Climate Policies in a Dynamic Multi-Country Equilibrium Model," Annual Conference 2016 (Augsburg): Demographic Change 145903, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc16:145903
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    JEL classification:

    • 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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