All regions of the world do not—and will not—experience the effects of CO2 emissions in the same way. Some will suffer greatly from the resultant climate change, while others may even benefit. These heterogeneous effects mean that different countries will have differing incentives to abide by the 2015 Paris Agreement, a climate change treaty meant to limit global warming below 2°C relative to pre-Industrial levels.
These differing incentives also complicate a classic economic tool to influence behavior: taxes or pricing. Do you want to reduce smoking? Increase cigarette taxes. Do you want to encourage home buying? Provide tax breaks. People respond to incentives, and price is a key incentive. In the case at hand, if you want to reduce carbon emissions to a desired level, tax their output accordingly. However, given the heterogeneous effects of CO2 emissions, what are the incentives to impose carbon taxes across different locations of the world? How are these incentives related to actual pledges in the Paris Agreement? What are the implications of these pledges for aggregate temperatures and the economies of different regions across the globe?
This novel research examines these questions by employing a spatial integrated assessment model that the authors developed in recent work1 to determine a local social cost of carbon (LSCC). This allows the authors to address the challenge of linking heterogeneous climate effects with appropriate local action. Very briefly, the authors find the following:
Bottom line: Increasing the elasticity of substitution between energy sources is essential to making required carbon policy among heterogeneous regions more palatable.
1See bfi.uchicago.edu/working-paper/the-economic-geography-of-global-warming/ for the authors’ 2021 paper, “The Economic Geography of Global Warming,”
along with an interactive global map and Research Brief.