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ECONOMICS AND CLIMATE CHANGE: INTEGRATED ASSESSMENT IN A MULTI-REGION WORLD

Journal article
Authors John Hassler
Per Krusell
Published in Journal of the European Economic Association
Volume 10
Issue 5
Pages 974-1000
ISSN 1542-4766
Publication year 2012
Published at Department of Economics
Pages 974-1000
Language en
Links dx.doi.org/10.1111/j.1542-4774.2012...
Keywords growth
Subject categories Economics

Abstract

This paper develops a model that integrates the climate and the global economyan integrated assessment modelwith which different policy scenarios can be analyzed and compared. The model is a dynamic stochastic general-equilibrium setup with a continuum of regions. Thus, it is a full stochastic general-equilibrium version of RICE, Nordhauss pioneering multi-region integrated assessment model. Like RICE, our model features traded fossil fuel but otherwise has no markets across regionsthere is no insurance nor any intertemporal trade across them. The extreme form of market incompleteness is not fully realistic but arguably not a bad approximation of reality. Its major advantage is that, along with a set of reasonable assumptions on preferences, technology, and nature, it allows a closed-form model solution. We use the model to assess the welfare consequences of carbon taxes that differ across as well as within oil-consuming and -producing regions. We show that, surprisingly, only taxes on oil producers can improve the climate: taxes on oil consumers have no effect at all. The calibrated model suggests large differences in views on climate policy across regions.

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