The Carbon Abatement Game
49 Pages Posted: 12 Feb 2018 Last revised: 14 Nov 2018
Date Written: November 14, 2018
Climate change is one of the major global challenges. Mitigating its impact is however bedeviled by free-rider problems and external effects. We thus study the problem of optimal carbon abatement in a dynamic non-cooperative game-theoretical setting involving multiple countries that are open economies. Our framework involves stochastic dynamics for CO$_2$ emissions and economic output of the countries. Each country is represented by a recursive-preference functional. Despite its complexity, the model is analytically tractable. We can explicitly quantify each country's decision on consumption, investment, and abatement expenditures. We also derive closed-form solutions for the country-specific and global social cost of carbon (SCC). One key finding is that both versions of the SCC are increasing in trade volume. This result is robust to adding capital transfers between countries. Our numerical examples suggest that disregarding trade might lead to a significant underestimation of the SCC.
Keywords: Climate change economics, Carbon abatement, Non-cooperative game, Social cost of carbon, Stochastic differential game, Trade, Transfers
JEL Classification: D81, Q5, Q54
Suggested Citation: Suggested Citation