DP8771 Economics and Climate Change: Integrated Assessment in a Multi-Region World

Author(s): John Hassler, Per Krusell
Publication Date: January 2012
Keyword(s): climate, dynamic, integrated assessment, regional, stochastic
JEL(s): H23, O44, Q0
Programme Areas: International Macroeconomics, Public Economics, International Trade and Regional Economics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8771

This paper develops a model that integrates the climate and the global economy---an integrated assessment model---with 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, Nordhaus's pioneering multi-region integrated assessment model. Like RICE, our model features traded fossil fuel but otherwise has no markets across regions---there is no insurance nor any intertemporal trade across them. The extreme form of market incompleteness is not fully realistic but arguably not a decent 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.