Working Paper: NBER ID: w24604
Authors: Christoph Hambel; Holger Kraft; Eduardo S. Schwartz
Abstract: Climate change is one of the major global challenges. Mitigating its impact is however bedeviled by free-rider problems and external effects. We thus study the problem of optimal carbon abatement in a dynamic non-cooperative game-theoretical setting involving multiple countries that are open economies. Our framework involves stochastic dynamics for CO2 emissions and economic output of the countries. Each country is represented by a recursive-preference functional. Despite its complexity, the model is analytically tractable. We can explicitly quantify each country's decision on consumption, investment, and abatement expenditures. We also derive closed-form solutions for the country-specific and global social cost of carbon (SCC). One key finding is that both versions of the SCC are increasing in trade volume. This result is robust to adding capital transfers between countries. Our numerical examples suggest that disregarding trade might lead to a significant underestimation of the SCC.
Keywords: carbon abatement; social cost of carbon; international trade; dynamic game theory
JEL Codes: D81; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade Volume (F10) | Social Cost of Carbon (D61) |
| Trade Volume (F10) | SCC Underestimations (C20) |
| Number of Countries (O57) | Optimal Abatement Efforts (Q52) |
| Optimal Abatement Efforts (Q52) | Social Cost of Carbon (D61) |