Working Paper: NBER ID: w30027
Authors: Josluis 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.
Keywords: Carbon Policy; Social Cost of Carbon; Climate Change; Paris Agreement
JEL Codes: F18; Q54; R1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| local carbon emissions (Q54) | economic welfare (D69) |
| geographic and economic factors (R12) | local social cost of carbon (LSCC) (H43) |
| magnitude of carbon reduction pledges (Q54) | efficacy in climate policy (Q58) |
| energy policy flexibility (Q48) | effectiveness of carbon taxation (H23) |