DP10870 Non-Cooperative and Cooperative Responses to Climate Catastrophes in the Global Economy: A North-South Perspective

Author(s): Aart J. de Zeeuw, Frederick van der Ploeg
Publication Date: October 2015
Keyword(s): asymmetries, carbon tax, free riding, global warming, growth, international cooperation, precautionary capital, risk avoidance, tipping point
JEL(s): D81, H20, O40, Q31, Q38
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10870

The optimal response to a potential productivity shock which becomes more imminent with global warming is to have carbon taxes to curb the risk of a calamity and to accumulate precautionary capital to facilitate smoothing of consumption. This paper investigates how differences between regions in terms of their vulnerability to climate change and their stage of development affect the cooperative and non-cooperative responses to this aspect of climate change. It is shown that the cooperative response to these stochastic tipping points requires converging carbon taxes for developing and developed regions. The non-cooperative response leads to a bit more precautionary saving and diverging carbon taxes. We illustrate the various outcomes with a simple stylized North-South model of the global economy.