Working Paper: NBER ID: w29224
Authors: Laurence J. Kotlikoff; Felix Kübler; Andrey Polbin; Simon Scheidegger
Abstract: Climate change will impact current and future generations in different regions very differently. This paper develops the first large-scale, annually calibrated, multi-region, overlapping generations model of climate change and carbon policy. It features region-specific temperature and damage functions with the phased impact of emissions on global and regional temperature calibrated to the latest scientific evidence. Absent policy, climate change may, under high-damage scenarios, dramatically reduce GDP in most regions, with India, Brazil, and the South Asian Pacific suffering long-term catastrophic damages. Carbon taxation, coupled with region- and generation-specific transfers, can both correct the carbon externality and raise the welfare of all current and future agents across all regions by 4.3 percent. The impact on the use and duration of fossil fuels is dramatic as is the reduction in the path of global emissions. However, achieving completely uniform welfare gains leaves future generations in particular regions facing exceptionally high compensatory payments. Fortunately, a carbon tax-cum redistribution policy that limits this burden for any generation in any region to less than 10 percent, measured on a consumption-equivalent basis, can deliver a 4.0 percent or higher welfare gain for all peoplekind – present and future. However, carbon taxes set through time, at carbon’s marginal social cost, do far too little to mitigate climate change unless all major emitters, particularly China, adopt them and do so immediately.
Keywords: Carbon Taxation; Climate Change; Welfare Gains; Overlapping Generations Model
JEL Codes: H23; O44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| carbon taxation (H23) | climate change mitigation (Q54) |
| climate change (Q54) | reductions in GDP (E20) |
| carbon taxation + region- and generation-specific transfers (H23) | correct carbon externality (D62) |
| carbon taxation (H23) | reduction in fossil fuel use (Q42) |
| carbon taxation (H23) | global emissions reduction (F64) |
| well-designed carbon tax policy (Q58) | limit burden on future generations (H60) |
| carbon taxes set at marginal social cost (H23) | insufficient to mitigate climate change (Q54) |
| international cooperation in carbon policy (F42) | meaningful climate change mitigation (Q54) |