NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Climate Policy under Cooperation and Competition between Regions with Spatial Heat Transport

Yongyang Cai, William Brock, Anastasios Xepapadeas, Kenneth Judd

NBER Working Paper No. 24473
Issued in March 2018, Revised in September 2019
NBER Program(s):The Environment and Energy Program

We build a novel stochastic dynamic regional integrated assessment model (IAM) of the climate and economic system including a number of important climate science elements that are missing in most IAMs. These elements are spatial heat transport from the Equator to the Poles, sea level rise, permafrost thaw and tipping points. We study optimal policies under cooperation and noncooperation between two regions (the North and the Tropic-South) in the face of risks and recursive utility. We introduce a new general computational algorithm to find feedback Nash equilibrium. Our results suggest that when the elements of climate science are ignored, important policy variables such as the optimal regional carbon tax and adaptation could be seriously biased. We also find the regional carbon tax is significantly smaller in the feedback Nash equilibrium than in the social planner’s problem in each region, and the North has higher carbon taxes than the Tropic-South.

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Document Object Identifier (DOI): 10.3386/w24473

 
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