Can today's and tomorrow's world uniformly gain from carbon taxation?

Abstract

Climate change will impact current and future generations in different regions very differently. This paper develops a large-scale, annually calibrated, multi-region, overlapping generations model of climate change to study its heterogeneous effects across space and time. We model the relationship between carbon emissions and the global average temperature based on the latest climate science. Predicated average global temperature is used to determine, via pattern-scaling, region-specific temperatures and damages. Our main focus is determining the carbon policy that delivers present and future mankind the highest uniform percentage welfare gains – arguably the policy with the highest chance of global adoption. Damages from climate change are positive for all regions apart from Russia and Canada, with India and South Asia Pacific suffering the most. The optimal policy is implemented via a time-varying global carbon tax plus region- and generation-specific net transfers. Uniform welfare improving carbon policy can materially limit global emissions, dramatically shorten the use of fossil fuels, and raise the welfare of all current and future agents by over four percent. Unfortunately, the pursuit of carbon policy by individual regions, even large ones, makes only a limited difference. However, coalitions of regions, particularly ones including China, can materially limit carbon emissions.