Working Paper: NBER ID: w17757
Authors: John Hassler; Per Krusell
Abstract: 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.
Keywords: Climate Change; Integrated Assessment Model; Carbon Taxes; Regional Heterogeneity
JEL Codes: H23; O44; Q0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| taxes on oil producers (L71) | improve climate outcomes (Q54) |
| taxes on oil consumers (H29) | no effect on oil use (N72) |
| taxes on oil producers (L71) | reduction in oil extraction over time (L71) |
| uniform tax on oil consumers (H29) | redistribution of resources away from oil producers (Q38) |
| tax receipts transferred to oil-producing countries (H87) | effectiveness of fossil fuel tax (H23) |