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Climate policy
Abstract
This paper makes suggestions for climate policy and defends them based on recent research in economics and the natural sciences. In summary: (i) the optimal carbon tax is rather modest; (ii) the key climate threat is coal; (iii) a carbon tax is to be preferred over a quantity-based system; (iv) the optimal tax on carbon does not appreciably harm growth; (v) subsidies to green technology are beneficial for the climate only to the extent that they make green technology outcompete coal; and (vi) a carbon tax is politically feasible.
... Regarding the choice of tax per unit of GHG emissions, there is a large body of literature on this topic which suggests different levels and time paths of the development of a GHG tax (e.g. Goulder and Mathai 2000;Tol 2005;Hope 2006;Nordhaus 2007;Waldhoff et al. 2011;Marten and Newbold 2012;Tol 2013;Crost and Traeger 2014;Marten et al. 2014;Hassler et al. 2016;Shindell et al. 2017). A general principle is that the tax should reflect the marginal damage cost of a GHG. ...
... In contrast to several of the studies applying the SC approach, studies calculating efficient taxes evaluate the development over time of these taxes (e.g. Goulder and Mathai 2000;Nordhaus 2007;Hassler et al. 2016;Crost and Traeger 2014). A common result is then that the development over time depends on the decay and discount rates. ...
... Studies estimating efficient carbon taxes have applied relatively simple climate models, regarded carbon emissions as inputs into production, and maximized the net value of carbon as shown in Eq. (9) in Section 3 (Goulder and Mathai 2000;Nordhaus 2007;Crost and Traeger 2014;Hassler et al. 2016). The studies on cost-effective abatement often applies a maximum concentration level in the atmosphere to be achieved in a certain time period, often within 100 years, at minimum cost (Goulder and Mathai 2000;Tavoni et al. 2007;Tol 2013). ...
... Advocacy activities of organizations and interest groups (IGs) have increased dramatically since the mid-1980s [2]. Organized as lobbyists, policy entrepreneurs, intermediaries, or advocacy coalitions, different stakeholders aim to influence agenda-setting and other policy actors' beliefs and preferences in the policy With the focus on a just transition, and an increasing presence of non-state actors in global climate governance and governance of the UN SDGs, scholars have raised the importance of analysing and evaluating climate and sustainability policy and governance not only from the perspective of cost-effectiveness advocated by economists [25,26], but also from perspectives of democracy, with a focus on legitimacy, accountability, and justice as guiding principles [27][28][29][30][31]. The transition to climate neutrality and sustainability must be fair and unite environmental and social justice issues [21,32]. ...
The concept of policy entrepreneurs has gained increasing attention in studies of policy change, including climate policy and governance. It foregrounds the role of agency in understanding policy change. However, agency of policy entrepreneurs in the policy process is political and conceals the power that shapes how public problems and policies are framed and defined. Thus, policy entrepreneurs should be confronted with the challenge of generating legitimacy, accountability, and justice in their actions and the implementation of their targeted policy change. Drawing on political–philosophical theories of liberal and deliberative democracy as well as environmental and ecological democracy this paper outlines a conceptual framework for critical analytical as well as normative research on strategies and impacts of policy entrepreneurs on democratic governance, primarily in climate policy but also more generally. Empirical research on the strategies and impacts of policy entrepreneurs in recent policymaking on climate change mitigation in the EU and Sweden identifies several deficits related to the democratic principles of legitimacy, accountability, and justice. It is found that policy entrepreneurs from different social spheres use cultural–institutional entrepreneurship to influence beliefs and perceptions on problems and policies. In addition, it is found that public sector policy entrepreneurs use structural entrepreneurship on ideological grounds to change existing power relations in climate governance. In all, the paper brings ideology and politics into research on policy entrepreneurs. It is suggested that not only the strategies used, but also the ideologies of the actors that use them, are decisive for the impacts of policy entrepreneurs, and thus, whether their advocacy will adhere to democratic norms and facilitate or hamper a just transition to climate neutrality and sustainability. The paper ends with proposals on how policy entrepreneurs can act more democratically, how to deal with populist policy entrepreneurs wanting to erode democracy, and conditions for climate justice movements to take responsibility and act in a more entrepreneurial way.
... With the focus on a just transition, and an increasing presence of non-governmental actors in global climate governance, scholars have raised the importance of analysing and evaluating climate policy not only from the perspective of cost-effectiveness advocated by economists (e.g. Hassler et al., 2016;Nordhaus, 2019), but also from perspectives democracy, with focus on legitimacy, accountability and justice as guiding principles (Newell, 2008;Biermann & Gupta, 2011;Bäckstrand et al., 2018;Jordan et al., 2015;Kuyper et al., 2018;Bouzarovski, 2022). Climate change and climate change mitigation includes social conflicts. ...
Sweden has long been hailed as a role model in climate policy. But the new right-wing government supported by a far-right populist party is undertaking a paradigm shift in Swedish climate policy and governance. This paper critically analyses this paradigm shift and its impacts on legitimacy, accountability and justice. These are democratic norms important in the analysis of a just transition to climate neutrality. Severe democratic deficits of the policy process and the policies proposed and adopted are identified, suggesting ‘nasty politics’ characterised by populist, divisive, and contentious rhetoric that entrenches polarization and us/them narratives. Climate scientists and the climate justice movement are discriminated in the policy process, the latter also being accused of terrorism and seen as a threat to democracy by the government. The deficits are partly explained by the neo-corporatist political system of Sweden and the dominance of the (neo)liberal discourse of ecological modernization in Swedish environmental policy, but primarily with the ongoing process of autocratization driven by anti-democratic far-right populist parties throughout Europe. The anti-democratic climate policy reforms in Sweden are foreboding an unwelcome development in the EU given the boost of far-right populist parties in the upcoming elections to the European Parliament in June 2024.
... With the focus on a just transition, and an increasing presence of NGOs in global climate governance and governance of the UN SDGs, scholars have raised the importance of analysing and evaluating climate policy not only from the perspective of cost-effectiveness advocated by economists (e.g. Hassler et al., 2016;Nordhaus, 2019), but also from perspectives of democracy, with focus on legitimacy, accountability and justice as guiding principles (Newell, 2008 Bouzarovski, 2022). Costs and benefits of the transition must be distributed fairly. ...
The concept of policy entrepreneurs has gained increasing attention in studies of climate policy and governance since it foregrounds the role of agency in understanding policy change. However, agency of policy entrepreneurs in the policy process is largely political and conceals the power that shapes how public problems and policies are framed and defined. Thus, policy entrepreneurs should be confronted with the challenge of generating legitimacy, accountability and justice of their actions and the implementation of their targeted policy change. Drawing on political-philosophical theories of liberal and deliberative democracy this paper outlines a conceptual framework for critical analytical as well as normative research on strategies and impacts of policy entrepreneurs. Empirical research on the strategies and impacts of policy entrepreneurs in recent policymaking on climate policy and governance in the EU and Sweden identifies several democratic deficits. In all, the paper brings ideology and politics into research on policy entrepreneurs. It is suggested that not only the strategies used, but also the ideologies of actors that use them, is the causal mechanism that links the policy entrepreneurs to the outcomes, and thus if their advocacy will facilitate or hamper a just transition to climate neutrality and sustainability.
... With the focus on a just transition, and an increasing presence of non-governmental actors in global climate governance, scholars have raised the importance of analysing and evaluating climate policy not only from the perspective of cost-effectiveness advocated by economists (e.g. Hassler et al., 2016;Nordhaus, 2019), but also from perspectives democracy, with focus on legitimacy, accountability and justice as guiding principles (Newell, 2008;Biermann & Gupta, 2011;Bäckstrand et al., 2018;Jordan et al., 2015;Kuyper et al., 2018;Bouzarovski, 2022). Climate change and climate change mitigation includes social conflicts. ...
Sweden has long been hailed as a role model in climate policy. But the new right-wing government supported by a far-right populist party is undertaking a paradigm shift in Swedish climate policy and governance. This paper critically analyses this paradigm shift from perspectives of legitimacy, accountability and justice. These are democratic norms important in the analysis of a just transition to climate neutrality. Severe democratic deficits of the policy process and the policies proposed and adopted are identified. The deficits are explained by the neo-corporatist political system of Sweden, the dominance of the (neo)liberal discourse of ecological modernization in Swedish environmental policy, and an ongoing process of autocratization driven by anti-democratic far-right populist parties throughout Europe. The paper ends by suggesting how climate policy and governance can be democratized and re-politicized, that also give room for climate justice advocates to take part in policy processes.
Macroeconomic research on carbon policy mostly revolves around carbon pricing mechanisms such as carbon taxes, cap-and-trade-schemes, and a mix of them. Despite their relevance, however, carbon pricing is not the only policy available to mitigate carbon emissions. A richer and diversified arsenal of carbon policies may prove more effective in addressing carbon mitigation across different social, economic and geographic contexts. We proposed a policy experiment, which took the form of a technical tax on fossil energy use aiming at stabilizing carbon dioxide emissions. The technical tax responded to variations in all elements that are supposed to alter climatic phenomena, that is, domestic carbon emissions, domestic fossil energy use, and the industrial stock of atmospheric carbon dioxide, to which all world economies contribute. The macro-effects of the technical tax were simulated using an off-the-shelf Real Business Cycles (RBC) model targeting the economy of the United States and featuring a climatic block. The economy was perturbed by a technology shock and an energy-price shock. Special care was devoted to the processes of validation and calibration. The tax was responsive to the business cycle and showed positive aspects. When a technology shock hit the economy, it curbed carbon emissions with minor costs in terms of potential output losses. It also protected the economy from an increase in energy prices, mitigating the fall in output despite the drop in fossil energy use. Last but not least, the tax effectively stabilized carbon dioxide emissions by reducing their variance.
John Broome and Duncan Foley have proposed an ingenious way to transfer benefits backwards in time, from people who are not here yet to people who will not be here in the future. Present people can crowd out conventional, and often brown, investments by issuing global climate bonds (GCBs). The debate about GCBs has focused on whether it is justified to use this financial instrument to allow future people to buy off present people for climate mitigation. In this article, I ask whether it is fair to use GCBs to share the cost of a global carbon price between present and future people. My answer is that it depends on the approach used to calculate the carbon price and, of course, on the normative claims underlying the different approaches. Specifically, I argue that the internalisation principle underlying the cost-benefit approach does not justify intergenerational cost-shifting if, as in most cases, the social cost of carbon is determined using, inter alia, a social discount rate. Instead, the conservative justifications underlying a cost-effective carbon price consistent with the Paris mitigation target allow for intergenerational cost-shifting, but only to the extent of the difference (if any) between the Paris-consistent and the Pareto-efficient carbon price.
The urgent need to achieve the COP-27 targets has become evident due to the more frequent and severe climate-induced disasters and their socioeconomic consequences. The adverse effects of climate change highlight the need for an immediate shift away from fossil fuels without compromising economic development. Internalization of the negative externality in market transactions through the imposition of carbon pricing is widely touted as the most economically efficient means of solving this problem. This study, however, argues that crude oil price volatility could be an unintended consequence of carbon pricing. To this end, information flows between the European Union Emissions Trading Scheme and crude oil price volatility are examined through transfer entropy and wavelet-partial wavelet coherence analyses. Daily data from January 1, 2014 to July 1, 2023 are analyzed. The transfer entropy results show that information on carbon pricing reduces uncertainty about crude oil price volatility and vice versa, indicating that carbon pricing would be quite informative in building models to predict crude oil price volatility. The wavelet-partial coherence analyses reveal that the surge in carbon prices experienced in the late 2010s induced crude oil volatility, whereas the crude oil price volatility triggered by the COVID-19 pandemic forced carbon prices down. This study therefore identifies carbon price movements as a legitimate fear for policymakers, as it is a new source of volatility in conventional energy markets. Caution should thus be the watchword regarding optimal carbon pricing. Aiming to rapidly attain the full optimal carbon price is not recommended. Rapid changes in carbon prices will have strong redistributive implications across economies.
In this paper, we analyze the response of the future world’s carbon stock to a reduction in global inequality among countries, using a framework that allows countries to make their environmental policy strategically. Heterogeneity across countries is related to income, emission technology, and environmental damage costs. We show that reducing global inequality would have a mitigating effect on the path of future world’s carbon stock if the relative number of richly-endowed countries in the subgroup of high-tech countries is greater than that in the subgroup of low-tech countries. The response of the future world’s carbon stock to a reduction in global inequality depends on the relative strength of two forces working in opposite directions: the mitigating force and the aggravating force. The mitigating force is associated with a measure of both richly-endowed/high-technology countries and poorly-endowed/low-technology countries. The aggravating force is associated with a measure of both richly-endowed/low-technology countries and poorly-endowed/high-technology countries. Status-seeking motives among countries act as a multiplier of the effects of the inequality reduction on the future path of the pollution stock. Our results highlight complex interactions to scrutinize in the design of international climate change policies while taking global inequality issues into account.
Within the field of innovation studies, researchers have identified systematic failures that hamper investment in R&D, innovation, and growth. Accordingly, researchers in this field often seek to provide policy recommendations on how to alleviate these failures. However, previous discussions have often been lacking considerations to the risks of political failures, meaning that policies fail to achieve their stated goals in a systematic manner. In response to this gap, this article aims to illustrate the concept of political failure and its relevance for innovation research. This is done by both discussing how political failure can impact innovation policy and by reviewing the prevalence of any discussions of political failure among top-ranked journals on innovation for the period 2010–2019, a total of 7161 articles. The results show that consideration of political failure is scarce, with a small number of papers that have a substantial analysis of political failures. If the awareness of political failures could be increased, this could lead to better policy recommendations with a more nuanced discussion of the risks and limitations of public policy.
Differentiating various types of entrepreneurs provides clues to the puzzle of why vertical or top-down policies often fail to create Schumpeterian entrepreneurship and the ecosystems where it thrives. Schumpeterian entrepreneurship is intrinsically contrarian, whereas public policy has a bias toward incremental innovation and replication of past success. If central planners knew what the next radical innovation would be, there would be no need for Schumpeterian entrepreneurs. Schumpeterian entrepreneurs create not only companies but also institutions in the entrepreneurial support system. These ever-evolving structures are too complex to design, and central planning instead reduces the space for organic institutional innovation.
The existing works in endogenous growth have focused on technology and rarely on population impacts. In contrast, the research on environmental degradation caused by fossil fuel utilization has relied mostly on exogenous technology and population growth. Building upon the previous literature, I propose a dynamic growth model that allows the interaction between an economy and energy consumption of renewable and nonrenewable and the transitional path from one to another. I also allow endogenous population growth, where the population is affected by living standards and industrialization and indirectly natural resources through production, considering the trade-off between nonrenewable energy reserves and renewable resources. By creating a feedback loop from the population to the level of industrialization and GDP in this setup, GDP per capita’s growth rate is lower under endogenous population scenario relative to exogenous population growth. This particular outcome conveys that many projections for future energy use might overestimate our energy use, hence the economic and environmental costs. Firms utilize nonrenewable energy more intensively in a decentralized model since they do not fully internalize the negative externalities that arise from using nonrenewable energy, unlike the social planner approach. Imposing carbon-tax elements on the energy producers’ profit would accelerate clean energy adaptation and sustain the fossil fuel resources for a more extended period while increasing the total welfare by 3%. It would also increase the individuals’ long-term total consumption.
We study countries’ compliance with the targets pledged in international climate-change agreements and the impact of those agreements and specific climate laws and policies on greenhouse-gas emissions and economic outcomes. To do so, we compile and codify data on international agreements and measures enacted at the national and sub-national levels. We find that compliance with targets has been mixed. Still, countries that signed the Kyoto Protocol or the Copenhagen Accord experienced significant reductions in emissions when compared to non-signatories. Having quantifiable targets led to further reductions. Effects from the Paris Agreement are not yet evident in the data. Carbon taxes and the introduction of emission-trading schemes led to material reductions in emissions. Other climate laws or policies do not appear to have had, individually, a material effect on emissions. The impact on GDP growth or inflation from most measures was largely insignificant. Overall, much more ambitious targets would be needed to offset the impact of economic and population growth on emissions and contain the expansion of the stock of gases.
This paper introduces a stress test framework designed to quantify financial stability risks related to the energy transition. As is standard in financial stress testing, we first construct various tail-event scenarios, in which we incorporate shocks to climate policy and energy technology. We then use various modeling approaches to derive macroeconomic and industry-specific implications of these shocks. To illustrate the framework, we use granular data on EUR 2.3 trillion in assets of more than 80 Dutch financial institutions. We find that financial losses due to credit and market risk could be sizeable. For instance, portfolios values can decline by up to 11%. Such magnitudes suggest that climate-transition risks warrant close attention from a financial stability perspective, while also underlining the importance of avoiding transitions that would be too late and too sudden.
The coronavirus disease 2019 (COVID-19) crisis ought to serve as a reminder about the costs of failure to consider another long-term risk, climate change. For this reason, it is imperative to consider the merits of policies that may help to limit climate damages. This essay rebuts three common objections to carbon taxes: (1) that they do not change behaviour , (2) that they generate unfair burdens and increase inequality, and (3) that fundamental , systemic change is needed instead of carbon taxes. The responses are (1) that there is both theoretical and empirical reason to think that carbon taxes do change behaviour , with larger taxes changing it to a greater extent; (2) that undistributed carbon taxes are regressive but distributing the tax receipts can alleviate that regressivity (and, in many cases, make the overall effect progressive); and (3) that while small changes for increasing democratic decision-making may be helpful, (fundamental) change takes time and the climate crisis requires urgent action.
RÉSUMÉ : La crise de la maladie à coronavirus 2019 (COVID-19) devrait servir de rappel sur les coûts de la non-prise en compte d'un autre risque à long terme, les changements climatiques. Pour cette raison, il est impératif de considérer les mérites des politiques susceptibles de contribuer à limiter les changements climatiques. Cet essai réfute trois objections courantes aux taxes sur le carbone : (1) qu'elles ne changent pas les comportements (2) qu'elles génèrent des charges injustes et augmentent les inégalités, et (3) qu'un change-ment fondamental et systémique est nécessaire au lieu de taxes sur le carbone. Les réponses sont (1) qu'il existe des raisons à la fois théoriques et empiriques de penser que les taxes sur le carbone modifient effectivement les comportements, et que des taxes plus élevées les modifient dans une plus grande mesure; (2) que les taxes sur le carbone non distribuées sont régressives, mais que la distribution des recettes fiscales peut atté-nuer cette régressivité (et, dans de nombreux cas, rendre l'effet global progressif); et (3) que, bien que de petits changements pour l'amélioration de la prise de décision démo-cratique peuvent être utiles, un changement (fondamental) prend du temps et la crise climatique exige une action urgente.
This paper examines the implications of imposing a climate tax on food consumption in Sweden combined with refunding of the tax revenues to farmers for selected agricultural activities enhancing ecosystem services: restoration of drained peatland (carbon sequestration), maintenance of grassland (biodiversity), and construction of wetlands (nutrient regulation). A partial equilibrium model of the agricultural sector is used to assess economic and environmental effects. The results show that the introduction of a climate tax corresponding to the existing Swedish CO2 tax of 115 euros per tonne carbon dioxide equivalent reduces total emissions from food consumption by 4.4% without any refunding of tax revenues. Refunding with payments for all ecosystems enhances the carbon sink by an amount equivalent to 57% of CO2e emissions from food consumption, and results in net benefits in the tax refund system for the agricultural sector as a whole, but is regressive where farmers in regions with relatively high incomes receive proportionally much of the net benefits.
In order to achieve the temperature goals of the Paris Agreement, the world must reach net‐zero carbon emissions around mid‐century, which calls for an entirely new energy system. Carbon pricing, in the shape of taxes or emissions trading schemes, is often seen as the main, or only, necessary climate policy instrument, based on theoretical expectations that this would promote innovation and diffusion of the new technologies necessary for full decarbonization. Here, we review the empirical knowledge available in academic ex‐post analyses of the effectiveness of existing, comparatively high‐price carbon pricing schemes in the European Union, New Zealand, British Columbia, and the Nordic countries. Some articles find short‐term operational effects, especially fuel switching in existing assets, but no article finds mentionable effects on technological change. Critically, all articles examining the effects on zero‐carbon investment found that existing carbon pricing scheme have had no effect at all. We conclude that the effectiveness of carbon pricing in stimulating innovation and zero‐carbon investment remains a theoretical argument. So far, there is no empirical evidence of its effectiveness in promoting the technological change necessary for full decarbonization.
This article is categorized under:
• Climate Economics > Economics of Mitigation
Abstract
Our review of empirical ex‐post evaluations of the effects of existing carbon pricing schemes reveals some effects on operational shifts, mainly switching coal to gas power, but no effect on the technological change necessary for full decarbonization.
Purpose
The purpose of the paper is to characterize an evaluation protocol of the social discount rate (SDR). This is based on the social rate of time preference (SRTP) principles, according to which the investment selection process must tend to maximize the utility of the community.
Design/methodology/approach
The theoretical reference of the evaluation protocol is represented by the Ramsey formula. It is widely used in many countries with advanced economics for the SRTP estimation, through the maximization of the Social Welfare Function (SWF).
Findings
The protocol structure and the protocol applications to the Italian and US economies explain how the SDR value is influenced by the socio-economic structure of the single nation.
Research limitations/implications
The strong variability of the results of the SDR according to the theoretical approach of reference and the operating path that follows can lead to judgments decidedly divergent on the acceptability of the public project, hence, the important policy implications for the entire allocation process of public resources.
Practical implications
The applications allow to highlight the important operational problems that must be resolved with regard to the choice of the time intervals of the evaluations, as well as logical-operational tools to be used to express estimates of parameters.
Social implications
They are relevant in relation to the effects of a more equitable allocation of the resources.
Originality/value
The protocol for the SDR estimation is based both on solid disciplinary principles and on objective data of non-complex availability and representative of the economic and socio-demographic context of the country in which the decision-making process is implemented.
In this paper we present a simple model for assessing the willingness to pay for reductions in the risk associated with catastrophic climate change. The model is extremely tractable and applies to a multiregion world but with global externalities and has five key features: (i) Neither the occurrence nor the costs of a catastrophic event in any one year are precisely predictable; (ii) the probability of a catastrophe occurring in any one year increases as the levels of greenhouse gases in the atmosphere increase; (iii) greenhouse gases are a worldwide public bad with emissions from any one country or region increasing the risks for all; (iv) there is two-sided irreversibility; if nothing is done and the problem proves serious, the climate, economic activity, and human life will suffer permanent damage, but if we spend large sums on countermeasures and the problem turns out to be minor or even nonexistent, we will have wasted resources unnecessarily; and (v) technological progress may yield partial or even complete solutions. The framework that we propose can give a sense of the quantitative significance of mitigation strategies. We illustrate these for a core set of parameter values.
Reducing greenhouse gas emissions to limit damage to the global economy climate-change-induced and secure the livelihoods of future generations requires ambitious mitigation strategies. The introduction of a global carbon tax on fossil fuels is tested here as a mitigation strategy to reduce atmospheric CO2 concentrations and radiative forcing. Taxation of fossil fuels potentially leads to changed composition of energy sources, including a larger relative contribution from bioenergy. Further, the introduction of a mitigation strategy reduces climate-change-induced damage to the global economy, and thus can indirectly affect consumption patterns and investments in agricultural technologies and yield enhancement. Here we assess the implications of changes in bioenergy demand as well as the indirectly caused changes in consumption and crop yields for global and national cropland area and terrestrial biosphere carbon balance. We apply a novel integrated assessment modelling framework, combining three previously published models (a climate–economy model, a socio-economic land use model and an ecosystem model). We develop reference and mitigation scenarios based on the narratives and key elements of the shared socio-economic pathways (SSPs). Taking emissions from the land use sector into account, we find that the introduction of a global carbon tax on the fossil fuel sector is an effective mitigation strategy only for scenarios with low population development and strong sustainability criteria (SSP1 “Taking the green road”). For scenarios with high population growth, low technological development and bioenergy production the high demand for cropland causes the terrestrial biosphere to switch from being a carbon sink to a source by the end of the 21st century.
We discuss climate change and resource scarcity from the perspective of macroeconomic modeling and quantitative evaluation. Our focus is on climate change: we build a very simple “integrated assessment model,” ie, a model that integrates the global economy and the climate in a unified framework. Such a model has three key modules: the climate, the carbon cycle, and the economy. We provide a description of how to build tractable and yet realistic modules of the climate and the carbon cycle. The baseline economic model, then, is static but has a macroeconomic structure, ie, it has the standard features of modern macroeconomic analysis. Thus, it is quantitatively specified and can be calibrated to obtain an approximate social cost of carbon. The static model is then used to illustrate a number of points that have been made in the broad literature on climate change. Our chapter begins, however, with a short discussion of resource scarcity—also from the perspective of standard macroeconomic modeling—offering a dynamic framework of analysis and stating the key challenges. Our last section combines resource scarcity and the integrated assessment setup within a fully dynamic general equilibrium model with uncertainty. That model delivers positive and normative quantitative implications and can be viewed as a platform for macroeconomic analysis of climate change and sustainability issues more broadly.
This paper examines the socially optimal pricing of carbon emissions over time when climate-change impacts are unknown, potentially high-consequence events. The carbon price tends to increase with income. But learning about impacts, or their absence, decouples the carbon price from income growth. The price should grow faster than the economy if the past warming is not substantial enough for learning the true long-run social cost. It grows slower than the economy as soon as the warming generates information about events that could have arrived but have not done so. A quantitative assessment shows that the price grows roughly at the rate of the economy for the next 100 years. This article is protected by copyright. All rights reserved.
Thomas Sterner's book is an attempt to encourage more widespread and careful use of economic policy instruments. The book compares the accumulated experiences of the use of economic policy instruments in the U.S. and Europe, as well as in rich and poor countries in Asia, Africa, and Latin America. Ambitious in scope, it discusses the design of instruments that can be employed in any country in a wide range of contexts, including transportation, industrial pollution, water pricing, waste, fisheries, forests, and agriculture.
This paper provides (for the nonspecialist) a highly streamlined discussion of the main issues, and controversies, in the design of climate mitigation policy. The first part of the paper discusses how much action to reduce greenhouse gas emissions at the global level is efficient under both the cost-effectiveness and welfare-maximizing paradigms. We then discuss various issues in the implementation of domestic emissions control policy, instrument choice, and incentives for technological innovation. Finally, we discuss alternative policy architectures at the international level.
Should governments use a discount rate that declines over time when evaluating the future benefits and costs of public projects?
The argument for using a declining discount rate (DDR) is simple: if the discount rates that will be applied in the future
are uncertain but positively correlated, and if the analyst can assign probabilities to these discount rates, then the result
will be a declining schedule of certainty-equivalent discount rates. There is a growing empirical literature that estimates
models of long-term interest rates and uses them to forecast the DDR schedule. However, this literature has been criticized
because it lacks a connection to the theory of project evaluation. In benefit-cost analysis, the net benefits of a project
in year t (in consumption units) are discounted to the present at the rate at which society would trade consumption in year t for consumption in the present. With simplifying assumptions, this leads to the Ramsey discounting formula, which results
in a declining certainty-equivalent discount rate if the rate of growth in consumption is uncertain and if shocks to consumption
are correlated over time. We conclude that the arguments in favor of a DDR are compelling and thus merit serious consideration
by regulatory agencies in the United States. (JEL: D61)
Earth's equilibrium climate sensitivity (ECS) and forcing of Earth's climate system over the industrial era have been re-examined in two new assessments: the Fifth Assessment Report (AR5) of the Intergovernmental Panel on Climate Change (IPCC), and a study by A. Otto and others (Nature Geosci., 2013). The ranges of these quantities given in these assessments and also in the Fourth (2007) IPCC Assessment are analyzed here within the framework of a planetary energy balance model, taking into account the observed increase in global mean surface temperature over the instrumental record together with best estimates of the rate of increase of planetary heat content. This analysis shows systematic differences among the several assessments and apparent inconsistencies within individual assessments. Importantly, the likely range of ECS to doubled CO2 given in AR5, 1.5 to 4.5 K/(3.7 W m-2) exceeds the range inferred from the assessed likely range of forcing, 1.2 to 2.9 K/(3.7 W m−2), where 3.7 W m−2 denotes the forcing for doubled CO2. Such differences underscore the need to identify their causes and reduce the underlying uncertainties. Explanations might involve underestimated negative aerosol forcing, overestimated total forcing, overestimated climate sensitivity, poorly constrained ocean heating, limitations of the energy balance model, or a combination of effects.Summary: Recent assessments of Earth's climate sensitivity and forcings over the industrial period, taking into account the observed increase in global mean surface temperature and rate of increase of planetary heat content, exhibit differences and apparent inconsistencies.
Declining time preference has a large effect on optimal climate policy, but efforts to surmount time consistency concerns have led modelers to adopt quasi-hyperbolic rates or to employ relatively simple climate economy mod-els. Neither approach is satisfactory. This paper shows that arbitrary non-constant time preference can be tractably incorporated into the neoclassical climate policy model suggested in Golosov, Hassler, Krusell, and Tsyvinski (2014). A planner who aggregates heterogeneous time preferences when ad-herents of Stern (2007) comprise 20 percent of the population increases the optimal carbon tax four-fold compared to a Nordhaus (2008) discounting ref-erence. Moreover, the value of a commitment device is convex in the commit-ment horizon; consequently, such a device would need to sustain commitment for a half-century or more to have significant value. Numerical extensions show that the restrictive assumptions needed to achieve analytic tractability are plausibly robust for the sake of motivating near-term policy.
Gremlins intervened in the preparation of my paper “The Economic Effects of Climate Change” published in the Spring 2009 issue of this journal. In Table 1 of that paper, titled “Estimates of the Welfare Impact of Climate Change,” minus signs were dropped from the two impact estimates, one by Plambeck and Hope (1996) and one by Hope (2006). In Figure 1 of that paper, titled “Fourteen Estimates of the Global Economic Impact of Climate Change,” and in the various analyses that support that figure, the minus sign was dropped from only one of the two estimates. The corresponding Table 1 and Figure 1 presented here correct these errors. Figure 2 titled, “Twenty-One Estimates of the Global Economic Impact of Climate Change” adds two overlooked estimates from before the time of the original 2009 paper and five more recent ones.
The objective of the JRC PESETA II project is to gain insights into the sectoral and regional patterns of climate change impacts in Europe by the end of this century. The study uses a large set of climate model runs and impact categories (ten impacts: agriculture, energy, river floods, droughts, forest fires, transport infrastructure, coasts, tourism, habitat suitability of forest tree species and human health). The project integrates biophysical direct climate impacts into a macroeconomic economic model, which enables the comparison of the different impacts based on common metrics (household welfare and economic activity). Under the reference simulation the annual total damages would be around €190 billion/year, almost 2% of EU GDP. The geographical distribution of the climate damages is very asymmetric with a clear bias towards the southern European regions. More than half of the overall annual EU damages are estimated to be due to the additional premature mortality (€120 billion). Moving to a 2°C world would reduce annual climate damages by €60 billion, to €120 billion (1.2% of GDP).
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Ciscar, J. C., Feyen, L., Soria, A., Lavalle, C., Raes, F., Perry, M., Nemry, F., Demirel, H., Rozsai, M., Dosio, A., Donatelli, M., Srivastava, A., Fumagalli, D., Niemeyer, S., Shrestha, S., Ciaian, P., Himics, M., Van Doorslaer, B., Barrios, S., Ibáñez, N., Forzieri, G., Rojas, R., Bianchi, A., Dowling, P., Camia, A., Libertà, G., San-Miguel-Ayanz, J., de Rigo, D., Caudullo, G., Barredo, J. I., Paci, D., Pycroft, J., Saveyn, B., Van Regemorter, D., Revesz, T., Vandyck, T., Vrontisi, Z., Baranzelli, C., Vandecasteele, I., Batista, Ibarreta, D., 2014. Climate Impacts in Europe - The JRC PESETA II project. Vol. 26586 of EUR – Scientific and Technical Research. ISSN:1831-9424, ISBN:978-92-79-36833-2, DOI:10.2791/7409. Publications Office of the European Union, 155 pp.
How much should governments subsidize the development of new clean technologies? We use patent citation data to investigate the relative intensity of knowledge spillovers in clean and dirty technologies in four technological fields: energy production, auto-mobiles, fuel and lighting. We find that clean patents receive on average 43% more citations than dirty patents. Clean patents are also cited by more prominent patents. These results hold for all four technological areas. Two factors are shown to explain the clean superiority: clean technologies have more general applications, and they are radically new compared to more incremental dirty innovation. Knowledge spillovers from clean technologies are comparable in scale to those observed in the IT sector. Our results mean that stronger public support for clean R&D is warranted. They also suggest that green policies might be able to boost economic growth.
We estimate an aggregate production function with constant elasticity of substitution between energy and a capital/labor composite using U.S. data. The implied measure of energy-saving technical change appears to respond strongly to the oil-price shocks in the 1970s and has a negative medium-run correlation with capital/labor-saving technical change. Our findings are suggestive of a model of directed technical change, with low short-run substitutability between energy and capital/labor but significant substitutability over longer periods through technical change. We construct such a model, calibrate it based on the historical data, and use it to discuss possibilities for the future.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
Climate is a persistent asset, bar none: changes in climate-related stocks have consequences spanning over centuries or possibly millennia to the future. To reconcile the discounting of such far-distant impacts and realism of the shorter-term decisions, we consider hyperbolic time-preferences in a climate-economy model. Time-changing utility discount rates have unexplored general-equilibrium effects: carbon prices exceed the pure carbon externality costs - the Pigouvian tax level - by multiple factors in our quantitative assessment. The climate-economy model is rich in details but can be solved in closed-form yielding Markov carbon prices dependent on climate system parameters, damage estimates, technology parameters, and both short- and long-term time preferences. The equilibrium time discount rate is endogenous, and it can justify high carbon taxes as advocated by Stern while maintaining the realism of the macroeconomic outcome, thus providing a solution for the dilemma centering the carbon tax-discount rate debate. The welfare ranking of the policy alternatives is unambiguous: enforcing the Pigouvian tax decreases a consistently-defined welfare measure vis-a-vis the Markov equilibrium.
In September 2011, the US Environmental Protection Agency asked 12 economists how the benefits and costs of regulations should be discounted for projects that affect future generations. This paper summarizes the views of the panel on three topics: the use of the Ramsey formula as an organizing principle for determining discount rates over long horizons, whether the discount rate should decline over time, and how intra- and intergenerational discounting practices can be made compatible. The panel members agree that the Ramsey formula provides a useful framework for thinking about intergenerational discounting. We also agree that theory provides compelling arguments for a declining certainty-equivalent discount rate. In the Ramsey formula, uncertainty about the future rate of growth in per capita consumption can lead to a declining consumption rate of discount, assuming that shocks to consumption are positively correlated. This uncertainty in future consumption growth rates may be estimated econometrically based on historic observations, or it can be derived from subjective uncertainty about the mean rate of growth in mean consumption or its volatility. Determining the remaining parameters of the Ramsey formula is, however, challenging.
With no revenue requirement, or where government can use lump-sum taxes, Arthur C. Pigou (1947) shows that the first-best tax on pollution is equal to the marginal environmental damage. Consumers then pay the social marginal cost of each item, the direct cost of resources, plus the indirect cost of pollution.
Suppose government needs more revenue, however, and cannot use lump-sum taxes. In this second-best world, our intuition might tell us to raise all tax rates: the tax on any "clean" commodity should be raised above its first-- best level of zero, and the tax on a "dirty" good should be raised above its first-best Pigovian level (the marginal environmental damage) . Despite this intuition, a recent paper by A. Lans Bovenberg and Ruud A. de Mooij ( 1994 p. 1085 ) claims to "... demonstrate that, in the presence of preexisting distortionary taxes, the optimal pollution tax typically lies below the Pigovian tax...."
This note argues that nothing is necessarily wrong with the intuition that all taxes should be raised. Nothing is wrong with the Bovenberg and de Mooij model either, but the above quote could be misinterpreted. I generalize their model to reconcile these opposing views.
Earlier writers have expressed several versions of the "double-dividend hypothesis."1 These views are discussed more below, but a strong version of this hypothesis might claim that a revenue-neutral switch toward a tax on the dirty good and away from taxation of clean goods can improve environmental quality and reduce the overall cost of tax distortions. By implication, this view might suggest that any additional revenue requirements should be met by raising the tax on the dirty good by more than taxes on clean goods. The important and correct result of Bovenberg and de Mooij is that this strong view is flawed.2 Even if the pollution tax helps solve an environmental problem, it likely worsens other tax distortions. Thus, the tax on the dirty good should rise by less than the tax on the clean good. Bovenberg and de Mooij focus on the differential between the tax rates on the clean and dirty goods, but they never quite say so. They assume the tax on the clean good is always zero, so their dirt tax is the differential. With this choice of normalization, starting with the dirt tax at the Pigovian rate, additional revenue would be raised by the labor tax while the dirt tax (differential) would fall.
However, other normalizations are equally valid and sometimes preferable. In their model, the extra labor tax is equivalent to a uniform tax on both goods. Thus, from the same starting point with the dirt tax at the Pigovian level, an equivalent policy would raise both the commodity tax rates. The total tax on the dirty good would then exceed the Pigovian level.
Bovenberg and de Mooij clearly understand this point, but their readers might not. Therefore, the first purpose of this note is just to clarify the interpretation of their results. The second purpose is to explore the role of "normalization" in a model with tax rates on both goods and on labor. Any one tax rate can be set to zero, as a conceptual matter, but implementation of some taxes might be easier than others as a practical matter.
Abstract Assessments of global coal, oil, and natural gas occurrences usually focus on conventional hydrocarbon reserves, i.e. those occurrences that can be exploited with current technology and present market conditions. The focus on reserves seriously underestimates long-term global hydrocarbon availability. Greenhouse gas emissions based on these estimates may convey the message that the world is running out of fossil fuels, and as a result, emissions would be reduced automatically. If the vast unconventional hydrocarbon occurrences are included in the resource estimates and historically observed rates of technology change are applied to their mobilization, the potential accessibility of fossil sources increases dramatically with long-term production costs that are not significantly higher than present market prices. Although the geographical hydrocarbon resource distribution varies significantly, a regional breakdown for 11 world regions indicates that neither hydrocarbon resource availability nor costs are likely to become forces that automatically would help wean the global energy system from the use of fossil fuel during the next century.
We analyze a dynamic stochastic general-equilibrium (DSGE) model with an externality through climate change from using fossil energy. A central result of our paper is an analytical derivation of a simple formula for the marginal externality damage of emissions. This formula, which holds under quite plausible assumptions, reveals that the damage is proportional to current GDP, with the proportion depending only on three factors: (i) discounting, (ii) the expected damage elasticity (how many percent of the output flow is lost from an extra unit of carbon in the atmosphere), and (iii) the structure of carbon depreciation in the atmosphere. Very importantly, future values of output, consumption, and the atmospheric CO2 concentration, as well as the paths of technology and population, and so on, all disappear from the formula. The optimal tax, using a standard Pigou argument, is then equal to this marginal externality. The simplicity of the formula allows the optimal tax to be easily parameterized and computed. Based on parameter estimates that rely on updated natural-science studies, we find that the optimal tax should be a bit higher than the median, or most well-known, estimates in the literature. We also show how the optimal taxes depend on the expectations and the possible resolution of the uncertainty regarding future damages. Finally, we compute the optimal and market paths for the use of energy and the corresponding climate change.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
How should carbon be taxed as a part of fiscal policy? The literature on optimal carbon pricing often abstracts from other taxes. However, when governments raise revenues with distortionary taxes, carbon levies have fiscal impacts. While they raise revenues directly, they may shrink the bases of other taxes (e.g. by decreasing employment). This article theoretically characterizes and then quantifies optimal carbon taxes in a dynamic general equilibrium climate–economy model with distortionary fiscal policy. First, this article establishes a novel theoretical relationship between the optimal taxation of carbon and of capital income. This link arises because carbon emissions destroy natural capital: they accumulate in the atmosphere and decrease future output. Consequently, this article shows how the standard logic against capital income taxes extends to distortions on environmental capital investments. Second, this article characterizes optimal climate policy in sub-optimal fiscal settings where income taxes are constrained to remain at their observed levels. Third, this article presents a detailed calibration that builds on the seminal DICE approach but adds features essential for a setting with distortionary taxes, such as a differentiation between climate change production impacts (e.g. on agriculture) and direct utility impacts (e.g. on biodiversity existence value). The central quantitative finding is that optimal carbon tax schedules are 8–24% lower when there are distortionary taxes, compared to the setting with lump-sum taxes considered in the literature.
This paper is a revised version of: http://ssrn.com/abstract=2643293.The paper derives the optimal carbon tax in closed-form from an integrated assessment of climate change. The formula shows how carbon, temperature, and economic dynamics quantify the optimal mitigation effort. The model's descriptive power is comparable to numeric models used in policy advising. Uncertainty surrounding climate change remains large, and the paper derives closed-form expressions of welfare loss from shocks and epistemological uncertainty. These expressions interact (intrinsic) risk attitude, distributional moments, and the climatic shadow values, and they exhibit different sensitivities to time preference. Welfare gains from reducing uncertainty about temperature feedbacks are much higher than the gains from better measurements of carbon flows.
We use the Euler equation to put forward a back-on-the-envelope rule for the global carbon tax based on a two-box carbon cycle with temperature lag, and a constant elasticity of marginal damages with respect to GDP. This tax falls with time impatience and intergenerational inequality aversion and rises with population growth and prudence. It also falls with growth in living standards if inequality aversion is large enough or marginal damages do not react much too GDP. It rises in proportion with GDP if marginal climate damages are proportional to output and has a flat time profile if they are additive. The rule also allows for mean reversion in climate damages. The rule closely approximates the true optimum for our IAM of Ramsey growth, scarce fossil fuel, energy transitions and stranded assets despite it using the more complicated DICE carbon cycle and temperature modules. The simple rule gets close to the social optimum even if damages are much more convex than in DICE.
The 1997 Kyoto Conference introduced emissions trading as a new policy instrument for climate protection. This book's contributions from the fields of economics, political science and law analyze theoretical aspects of regulatory instruments for climate policy, provide an overview of U.S. experience with market-based instruments, draw lessons from existing trading schemes for the control of greenhouse gases, and discuss options for emissions trading in climate policy. They also highlight the background of climate policy and instrument choice in the U.S and Europe.
It is difficult to resolve the global warming free-rider externality problem by negotiating n different quantity targets. By contrast, negotiating a single internationally binding minimum carbon price (the proceeds from which are domestically retained) counters self-interest by incentivizing agents to internalize the externality. The model of this article indicates an exact sense in which each agent’s extra cost from a higher emissions price is counterbalanced by that agent’s extra benefit from inducing all other agents to simultaneously lower their emissions in response to the higher price. Some implications are discussed. While the study is centered on a formal model, the tone of the policy discussion resembles more an exploratory think piece.
The economics of global climate change is characterized by fundamental uncertainties, including the appropriate reduced forms for climate dynamics, the specification of economic damages resulting from climate change, and mechanisms by which these damages will affect long-run economic growth. Using a dynamic integrated assessment framework, this paper makes several contributions to improving the analysis of these uncertainties. First, we incorporate the cumulative climate response (CCR) function developed by Matthews et al. for representing the basic relationship between anthropogenic carbon emissions and increases in global mean temperature in a manner that is more directly policy relevant than the usual approach based on the equilibrium climate sensitivity. Second, we adapt the tools developed by Hansen, Sargent and others for robustness analysis to address underlying model uncertainty in both economic and climate dynamics. Third, we allow climate change to affect economic growth directly, in addition to its effect on output. We develop and study a simple analytical model that yields insights and results on the key implications of these assumptions, as well as facilitating the interpretation of numerical results from a more general model. Among our findings is that the presence of robustness may result in either a decrease or increase in the optimal carbon tax and energy usage, depending among other factors on societal preferences.
Carbon taxes are a potential revenue source that could play a key role in major tax reform. This paper employs a numerical general equilibrium model of the United States to evaluate alternative tax reductions that could be financed by the revenues from a carbon tax. We consider a carbon tax that begins at $10 per ton in 2013 and increases at 5 percent per year to the year 2040. The net revenue from the tax is substantial, and the GDP and welfare impacts of the tax depend significantly on how this revenue is recycled to the private sector. Under our central case simulations (which do not account for beneficial environmental impacts) over the period 2013–2040, the tax reduces GDP by .56 percent when revenues are returned through lump-sum rebates to households, as compared with .33 and .24 percent when the revenues are recycled through reductions in personal and corporate tax rates, respectively. Introducing tradable exemptions to the carbon tax reduces or eliminates the negative impacts on the profits of the most vulnerable carbon-supplying or carbon-using industries. The GDP and welfare impacts are somewhat larger when such exemptions are introduced.
Last year, the world gathered at Kyoto to grapple with the threat of global warming. But the Kyoto approach--negotiations to set national limits on the emissions of the greenhouse gases that are heating the earth--cannot solve the problem. The emissions targets will never be met without the cooperation of the developing countries, and they will not consent. We would do better to attack global warming through mutually agreed-upon actions, especially a nationally collected tax on greenhouse gas emissions.
The social cost of carbon (SCC) is an important concept for understanding and implementing climate change policies. This term represents the economic cost caused by an additional ton of carbon dioxide emissions (or more succinctly carbon) or its equivalent. The present study describes the development of the concept, provides examples of its use in current US regulator policies, examines its analytical background, and estimates the SCC using an updated integrated assessment model, the DICE-2013R model. The study estimates that the SCC is $18.6 per ton of CO2 in 2005 US dollars and international prices for the current period (2015). For the central case, the real SCC grows at 3% per year over the period to 2050. The major open issues concerning the SCC continue to be the appropriate discount rate, the potential for catastrophic damages, the impact of incomplete harmonization of abatement policies, and the effects of distortionary taxes.
Policy makers have generally agreed that the average global temperature rise caused by greenhouse gas emissions should not exceed 2 °C above the average global temperature of pre-industrial times. It has been estimated that to have at least a 50 per cent chance of keeping warming below 2 °C throughout the twenty-first century, the cumulative carbon emissions between 2011 and 2050 need to be limited to around 1,100 gigatonnes of carbon dioxide (Gt CO2). However, the greenhouse gas emissions contained in present estimates of global fossil fuel reserves are around three times higher than this, and so the unabated use of all current fossil fuel reserves is incompatible with a warming limit of 2 °C. Here we use a single integrated assessment model that contains estimates of the quantities, locations and nature of the world's oil, gas and coal reserves and resources, and which is shown to be consistent with a wide variety of modelling approaches with different assumptions, to explore the implications of this emissions limit for fossil fuel production in different regions. Our results suggest that, globally, a third of oil reserves, half of gas reserves and over 80 per cent of current coal reserves should remain unused from 2010 to 2050 in order to meet the target of 2 °C. We show that development of resources in the Arctic and any increase in unconventional oil production are incommensurate with efforts to limit average global warming to 2 °C. Our results show that policy makers' instincts to exploit rapidly and completely their territorial fossil fuels are, in aggregate, inconsistent with their commitments to this temperature limit. Implementation of this policy commitment would also render unnecessary continued substantial expenditure on fossil fuel exploration, because any new discoveries could not lead to increased aggregate production.
Optimal climate policy is investigated in a Ramsey growth model of the global economy with exhaustible oil reserves, an infinitely elastic supply of renewables, stock-dependent oil extraction costs, and convex climate damages. Four regimes can occur, depending on the initial social cost of oil being larger or smaller than that of renewables and depending on the initial oil stock being large or small. We also offer some policy simulations for the first and second regime, which illustrate that with a lower discount rate more oil is left in situ and renewables are phased in more quickly. We identify the conditions under which the optimal carbon tax rises or decreases. Subsidizing renewables (without a carbon tax) induces more oil to be left in situ and a quicker phasing in of renewables, but oil is depleted more rapidly initially. The net effect on global warming is ambiguous.
Economic growth over the coming centuries is one of the major determinants of today's optimal greenhouse gas mitigation policy. At the same time, long-run economic growth is highly uncertain. This paper is the first to evaluate optimal mitigation policy under long-term growth uncertainty in a stochastic integrated assessment model of climate change. The sign and magnitude of the impact depend on preference characteristics and on how damages scale with production. We explain the different mechanisms driving optimal mitigation under certain growth, under uncertain technological progress in the discounted expected utility model, and under uncertain technological progress in a more comprehensive asset pricing model based on Epstein-Zin-Weil preferences. In the latter framework, the dominating uncertainty impact has the opposite sign of a deterministic growth impact; the sign switch results from an endogenous pessimism weighting. All of our numeric scenarios use a DICE based assessment model and find a higher optimal carbon tax than the deterministic DICE base case calibration.
Abstract The first half of the Review focuses on the impacts and risks arising from uncontrolled climate change, and on the costs and opportunities associated with action to tackle it. A sound understanding of the economics of risk is critical here. The Review ...
We conduct a geographically and temporally disaggregated empirical analysis of civil conflict at the sub-national level in Africa over the period 1997-2011. Our units of observation are cells of 1 degree of latitude by 1 degree of longitude. We exploit within-year variation in the timing of weather shocks and in the growing season of different crops, as well as spatial variation in crop cover, to construct an original measure of shocks that are relevant for agricultural production. Employing a new drought index we show that negative climate shocks which occur during the growing season of the main crop cultivated in the cell have a sizeable and persistent effect on conflict incidence. We also use state-of-the-art spatial econometric techniques to test for the presence of temporal and spatial spillovers in conflict, and we find both to be sizeable and highly statistically significant. Exploiting variation in the type of conflict episode, we find that the impact of climate shocks on conflict is particularly significant when focusing on outcomes such as battles and violence against civilians. Our estimates can be used to predict how future warming scenarios affect the prevalence and diffusion of conflict.
We propose a dynamic spatial theory to analyze the geographic impact of climate change. Agricultural and manufacturing firms locate on a hemisphere. Trade across locations is costly, firms innovate, and technology diffuses over space. Energy used in production leads to emissions that contribute to the global stock of carbon in the atmosphere, which affects temperature. The rise in temperature differs across latitudes and sectors. We calibrate the model to analyze how climate change affects the spatial distribution of economic activity, trade, migration, growth, and welfare. We assess quantitatively the impact of migration and trade restrictions, energy taxes, and innovation subsidies.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
This paper uses historical fluctuations in temperature within countries to identify its effects on aggregate economic outcomes. We find three primary results. First, higher temperatures substantially reduce economic growth in poor countries. Second, higher temperatures may reduce growth rates, not just the level of output. Third, higher temperatures have wide-ranging effects, reducing agricultural output, industrial output, and political stability. These findings inform debates over climate's role in economic development and suggest the possibility of substantial negative impacts of higher temperatures on poor countries. (JEL E23, O13, Q54, Q56)
This study reviews different approaches to the political and economic control of global public goods such as global warming.
It compares quantity-oriented control mechanisms like the Kyoto Protocol with price-type control mechanisms such as internationally
harmonized carbon taxes. The analysis focuses on such issues as the relationship to ultimate targets, performance under conditions
of uncertainty, volatility of induced carbon prices, the inefficiencies of taxation and regulation, potential for corruption
and accounting finagling, and ease of implementation. It concludes that price-type approaches such as carbon taxes have major
advantages for slowing global warming.
A model of the ocean and seafloor carbon cycle is subjected to injection of new CO2 pulses of varying sizes to estimate the resident atmospheric fraction over the coming 100 kyr. The model is used to separate the processes of air-sea equilibrium, an ocean temperature feedback, CaCO3 compensation, and silicate weathering on the residual anthropogenic pCO2 in the atmosphere at 1, 10, and 100 kyr. The mean lifetime of anthropogenic CO2 is dominated by the long tail, resulting in a range of 30-35 kyr. The long lifetime of fossil fuel carbon release implies that the anthropogenic climate perturbation may have time to interact with ice sheets, methane clathrate deposits, and glacial/interglacial climate dynamics.
This paper develops a model that integrates the climate and the global economy - an integrated assessment model - with which different policy scenarios can be analyzed and compared. The model is a dynamic stochastic general-equilibrium setup with a continuum of regions. Thus, it is a full stochastic general-equilibrium version of RICE, Nordhaus's pioneering multi-region integrated assessment model. Like RICE, our model features traded fossil fuel but otherwise has no markets across regions - there is no insurance nor any intertemporal trade across them. The extreme form of market incompleteness is not fully realistic but arguably not a decent approximation of reality. Its major advantage is that, along with a set of reasonable assumptions on preferences, technology, and nature, it allows a closed-form model solution. We use the model to assess the welfare consequences of carbon taxes that differ across as well as within oil-consuming and - producing regions. We show that, surprisingly, only taxes on oil producers can improve the climate: taxes on oil consumers have no effect at all. The calibrated model suggests large differences in views on climate policy across regions.
This paper introduces endogenous and directed technical change in a growth model with environmental constraints. A unique final good is produced by combining inputs from two sectors. One of these sectors uses "dirty" machines and thus creates environmental degradation. Research can be directed to improving the technology of machines in either sector. We characterize dynamic tax policies that achieve sustainable growth or maximize intertemporal welfare. We show that: (i) in the case where the inputs are sufficiently substitutable, sustainable long-run growth can be achieved with temporary taxation of dirty innovation and production; (ii) optimal policy involves both .carbon taxes. and research subsidies, so that excessive use of carbon taxes is avoided; (iii) delay in intervention is costly: the sooner and the stronger is the policy response, the shorter is the slow growth transition phase; (iv) the use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire when the two inputs are substitutes. Under reasonable parameter values and with sufficient substitutability between inputs, it is optimal to redirect technical change towards clean technologies immediately and optimal environmental regulation need not reduce long-run growth.
This paper provides (for the nonspecialist) a highly streamlined discussion of the main issues, and controversies, in the design of climate mitigation policy. The first part of the paper discusses how much action to reduce greenhouse gas emissions at the global level is efficient under both the cost-effectiveness and welfare-maximizing paradigms. We then discuss various issues in the implementation of domestic emissions control policy, instrument choice, and incentives for technological innovation. Finally, we discuss alternative policy architectures at the international level. (JEL Q54, Q58)