Working Paper: NBER ID: w24473
Authors: Yongyang Cai; William Brock; Anastasios Xepapadeas; Kenneth Judd
Abstract: We build a novel stochastic dynamic regional integrated assessment model (IAM) of the climate and economic system including a number of important climate science elements that are missing in most IAMs. These elements are spatial heat transport from the Equator to the Poles, sea level rise, permafrost thaw and tipping points. We study optimal policies under cooperation and noncooperation between two regions (the North and the Tropic-South) in the face of risks and recursive utility. We introduce a new general computational algorithm to find feedback Nash equilibrium. Our results suggest that when the elements of climate science are ignored, important policy variables such as the optimal regional carbon tax and adaptation could be seriously biased. We also find the regional carbon tax is significantly smaller in the feedback Nash equilibrium than in the social planner’s problem in each region, and the North has higher carbon taxes than the Tropic-South.
Keywords: integrated assessment model; spatial heat transport; carbon taxes; adaptation; sea level rise; stochastic; tipping points; feedback Nash equilibrium
JEL Codes: C61; C63; Q54; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Ignoring critical climate science elements (Q54) | Flawed policy outcomes (D78) |
| Type of equilibrium (D50) | Level of carbon tax (H23) |
| Regional economic conditions and climate impacts (R11) | Level of carbon tax (H23) |
| Intertemporal elasticity of substitution (D15) | Regional carbon taxes (H23) |