The Trade-Off between Intra- and Intergenerational Equity in Climate Policy

46 Pages Posted: 26 Jun 2013 Last revised: 16 Jan 2014

Snorre Kverndokk

Ragnar Frisch Centre for Economic Research

Eric Naevdal

Princeton University - Woodrow Wilson School of Public and International Affairs

Linda Nøstbakken

Norwegian School of Economics (NHH) - Department of Economics

Date Written: December 1, 2013

Abstract

This paper focuses on two equity dimensions of climate policy, intra- and intergenerational equity, and analyzes the implications of equity preferences on climate policy, and on the production and consumption patterns in rich and poor countries. We develop a dynamic two-region model, in which each region suffers from local pollution and global warming, but also has an inequality aversion over current consumption allocations. Inequality aversion lifts the consumption path of the poor region, while the rich region must take a greater share of the climate burden. Furthermore, with inequality aversion, the optimal climate policy leads to higher investment in clean capital in the North and in dirty capital in the South, thereby allowing the South to pollute more and develop faster. The optimal policy may even require the poor region to increase emissions relative to the uncoordinated business-as-usual case. Introducing transfers between the regions reinforces these effects. However, loans to poor countries to reduce inequality may result in a debt crisis, and hence, debt remittance may be part of the optimal climate policy.

Keywords: intragenerational equity, intergenerational equity, inequality aversion, climate policy, economic development, international transfers, debt crisis

JEL Classification: C630, D310, D630, Q540

Suggested Citation

Kverndokk, Snorre and Naevdal, Eric and Nøstbakken, Linda, The Trade-Off between Intra- and Intergenerational Equity in Climate Policy (December 1, 2013). CESifo Working Paper Series No. 4285. Available at SSRN: https://ssrn.com/abstract=2284777

Snorre Kverndokk (Contact Author)

Ragnar Frisch Centre for Economic Research ( email )

Gaustadalleen 21
N-0349 Oslo
Norway
+47 22958811 (Phone)
+47 22958825 (Fax)

HOME PAGE: http://www.frisch.uio.no/cv/snorrek_eng.html

Eric Naevdal

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

Linda Nøstbakken

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway
+47-55959134 (Phone)

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