Working Paper: CEPR ID: DP10870
Authors: Frederick van der Ploeg; Aart J. de Zeeuw
Abstract: The optimal response to a potential productivity shock which becomes more imminent with global warming is to have carbon taxes to curb the risk of a calamity and to accumulate precautionary capital to facilitate smoothing of consumption. This paper investigates how differences between regions in terms of their vulnerability to climate change and their stage of development affect the cooperative and non-cooperative responses to this aspect of climate change. It is shown that the cooperative response to these stochastic tipping points requires converging carbon taxes for developing and developed regions. The non-cooperative response leads to a bit more precautionary saving and diverging carbon taxes. We illustrate the various outcomes with a simple stylized North-South model of the global economy.
Keywords: asymmetries; carbon tax; free riding; global warming; growth; international cooperation; precautionary capital; risk avoidance; tipping point
JEL Codes: D81; H20; O40; Q31; Q38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cooperation (P13) | converging carbon taxes (H23) |
| lack of cooperation (P13) | diverging carbon taxes (H23) |
| lack of cooperation (P13) | increased precautionary savings (E21) |
| noncooperative response (C72) | increased risk of climate catastrophes (Q54) |
| cooperation (P13) | effectiveness of climate policies (F68) |
| diverging carbon taxes (H23) | exacerbated climate risks (Q54) |