Can Today's and Tomorrow's World Uniformly Gain from Carbon Taxation?

55 Pages Posted: 13 Sep 2021 Last revised: 30 Apr 2022

See all articles by Laurence J. Kotlikoff

Laurence J. Kotlikoff

Boston University - Department of Economics; National Bureau of Economic Research (NBER); Gaidar Institute for Economic Policy

Felix Kubler

University of Zurich

Andrey Vladimirovitch Polbin

Russian Academy of National Economy and Public Administration under the President of the Russian Federation (RANEPA); Gaidar Institute for Economic Policy

Simon Scheidegger

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Date Written: September 2021

Abstract

Climate change will impact current and future generations in different regions very differently. This paper develops the first large-scale, annually calibrated, multi-region, overlapping generations model of climate change and carbon policy. It features region-specific temperature and damage functions with the phased impact of emissions on global and regional temperature calibrated to the latest scientific evidence. Absent policy, calibrated worst-case damages in the next 200 years reach and remain near 20 percent of GDP for most regions, with India, Brazil, and the South Asian Pacific suffering roughly 40 percent of GDP losses. Russia and Canada benefit somewhat from global warming. Carbon taxation, coupled with region- and generation-specific transfers, can both correct the carbon externality and raise the welfare of all current and future agents across all regions by 4.3 percent. The impact on the use and duration of fossil fuels is dramatic, as is the reduction in the path of global emissions. However, achieving completely uniform welfare gains leaves future generations in particular regions with exceptionally high net taxes. Fortunately, a carbon tax-cum redistribution policy that limits the consumption-equivalent net tax burden on any generation in any region to less than 10 percent can deliver a 4.0 percent or higher welfare gain for all peoplekind – present and future. However, carbon taxes set through time, at carbon’s marginal intertemporal social cost do far too little to mitigate climate change unless all major emitters, particularly China, adopt them and do so immediately.

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Suggested Citation

Kotlikoff, Laurence J. and Kubler, Felix and Polbin, Andrey Vladimirovitch and Scheidegger, Simon, Can Today's and Tomorrow's World Uniformly Gain from Carbon Taxation? (September 2021). NBER Working Paper No. w29224, Available at SSRN: https://ssrn.com/abstract=3922498

Laurence J. Kotlikoff (Contact Author)

Boston University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Gaidar Institute for Economic Policy

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Felix Kubler

University of Zurich ( email )

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Zürich, CH-8006
Switzerland

Andrey Vladimirovitch Polbin

Russian Academy of National Economy and Public Administration under the President of the Russian Federation (RANEPA) ( email )

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Moscow, St. Petersburg 119571
Russia

Gaidar Institute for Economic Policy ( email )

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Moscow, 125009
Russia

Simon Scheidegger

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

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