Working Paper: CEPR ID: DP17299
Authors: Joseluis Cruz; Esteban Rossi-Hansberg
Abstract: We study local carbon policy to address the consequences of climate change. Standard analysis suggests that the social cost of carbon determines optimal carbon policy. We start by using the spatial integrated assessment model in Cruz and Rossi-Hansberg (2021) to measure the local social monetary cost of CO2 emissions: the Local Social Cost of Carbon (LSCC). Although the largest welfare costs from global warming are concentrated in the warmest parts of the developing world, adjusting for the local marginal utility of income implies that the LSCC peaks in warm and high-income regions like the southern parts of the U.S. and Europe, as well as Australia. We then proceed to study the effect of the actual carbon reduction pledges in the Paris Agreement and the progress they can make in implementing the expressed goal of keeping global temperature increases below 2°C. We find that although the distribution of pledges is roughly in line with the LSCC, their magnitude is largely insufficient to achieve its goals. The required carbon taxes necessary to keep temperatures below 2°C over the current century are an order of magnitude higher and involve large implicit inter-temporal transfers. Increasing the elasticity of substitution across energy sources is important to reduce the carbon taxes necessary to achieve warming goals.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| local social cost of carbon (LSCC) (H43) | carbon pricing incentives (Q58) |
| regional wealth (R11) | local social cost of carbon (LSCC) (H43) |
| temperature (Y60) | local social cost of carbon (LSCC) (H43) |
| local social cost of carbon (LSCC) (H43) | local carbon tax policies (H23) |
| inadequate policy measures (L52) | potential climate outcomes (Q54) |
| unilateral actions by wealthier regions (F69) | carbon leakage (Q54) |
| required carbon taxes (H23) | intertemporal transfers (D15) |
| elasticity of substitution (D11) | required carbon taxes (H23) |