The Political Economy of Mitigation and Adaptation

35 Pages Posted: 10 Mar 2016

See all articles by Wolfgang Habla

Wolfgang Habla

ZEW – Leibniz Centre for European Economic Research - Environmental and Resource Economics, Environmental Management Research

Kerstin Roeder

Ludwig Maximilian University of Munich (LMU); University of Augsburg

Date Written: January 27, 2016

Abstract

In this paper, we acknowledge that the mitigation of and adaptation to climate change have differential fiscal impacts. Whereas mitigation typically raises fiscal revenues, adaptation is costly to the taxpayer and to a greater extent the more distortionary the tax system is. In an OLG model with majority voting, we analyze how the choices of mitigation and adaptation are distorted under a lump-sum and a distortionary income tax regime. We find that whenever emissions and adaptation exhibit stock characteristics, the levels of mitigation and adaptation are chosen inefficiently low in the political equilibrium under lump-sum taxation. By contrast, the political equilibrium may entail inefficiently high mitigation or inefficiently high adaptation (but not both simultaneously) if the tax system is distortionary. A calibration of our model to the German economy shows that both mitigation and adaptation can be expected to be inefficiently low in the political equilibrium. Furthermore, the standard assumption of a lump-sum tax system when analyzing mitigation and adaptation is found to underestimate the loss in utilitarian welfare relative to a distortionary tax system, although mitigation levels are generally higher under the latter regime.

Keywords: adaptation, mitigation, political economy, majority voting, OLG, environmental taxes

JEL Classification: D720, D780, H210, H230, Q580

Suggested Citation

Habla, Wolfgang and Roeder, Kerstin, The Political Economy of Mitigation and Adaptation (January 27, 2016). CESifo Working Paper Series No. 5729, Available at SSRN: https://ssrn.com/abstract=2743148

Wolfgang Habla

ZEW – Leibniz Centre for European Economic Research - Environmental and Resource Economics, Environmental Management Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim
Germany

Kerstin Roeder (Contact Author)

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

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