Global Economic and Environmental Outcomes of the Paris Agreement

Abstract

In this paper, we use a multi-region model of the world economy to analyze the economic and environmental outcomes that are likely to result from Paris Climate Agreement. To construct the modeling scenario, we convert the disparate emission targets for each country or region in their Nationally Determined Contributions (NDC) formulations into estimated reductions in CO2 emissions relative to a baseline scenario with no new climate policies. We then solve for the tax rate path on CO2 in each region that achieves the NDC-consistent emissions reductions in the target year, 2030 for most regions.

We find that if all regions achieve their NDCs, the Paris Agreement significantly reduces CO2 emissions relative to baseline. However, the Paris policy scenario suggests that global CO2 emissions would not decline in absolute terms relative to 2015 levels, let alone follow a path consistent with a 2°C stabilization scenario.

Comparing projected 2030 CO2 tax rates to the same year’s percent emissions abatement relative to baseline, we find that declines in CO2 emissions do not necessarily correlate with the CO2 tax rate. We find the climate policies result in significant macroeconomic spillovers across the global economy, meaning that macroeconomic outcomes across countries depend not only on their own commitments but also on those of the rest of the world.

We also explore how outcomes could change if select countries (United States, China and Australia) unilaterally withdraw from the agreement and undertake no new climate policies. We find that non-participation leads to economic gains (in terms of GDP) for these countries relative to participating, illustrating the challenge of forging an international agreement with participation by all major emitters and fossil fuel producers. However, we also find that if we account for the monetized climate and domestic co-benefits of emissions reductions, those countries, including Australia, are worse off if they unilaterally withdraw from the Paris Agreement than if they participate. Thus, although we find there are gross costs to participating, doing so generates net benefits for the individual country participants.

Keywords: climate change, Paris Climate Agreement, global macroeconomic modeling, G-Cubed, carbon taxes

JEL Classification: C54, F17, F41, F47, Q43, Q54