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

Author

Listed:
  • Laurence J. Kotlikoff
  • Felix Kubler
  • Andrey Polbin
  • Simon Scheidegger
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, climate change may, under high-damage scenarios, dramatically reduce GDP in most regions, with India, Brazil, and the South Asian Pacific suffering long-term catastrophic damages. 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 facing exceptionally high compensatory payments. Fortunately, a carbon tax-cum redistribution policy that limits this burden for any generation in any region to less than 10 percent, measured on a consumption-equivalent basis, 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 social cost, do far too little to mitigate climate change unless all major emitters, particularly China, adopt them and do so immediately.

Suggested Citation

  • Laurence J. Kotlikoff & Felix Kubler & Andrey Polbin & Simon Scheidegger, 2021. "Can Today's and Tomorrow's World Uniformly Gain from Carbon Taxation?," NBER Working Papers 29224, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29224
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    2. Eric Jondeau & Grégory Levieuge & Jean-Guillaume Sahuc & Gauthier Vermandel, 2023. "Environmental Subsidies to Mitigate Net-Zero Transition Costs," Working papers 910, Banque de France.
    3. Eric Jondeau & Gregory Levieuge & Jean-Guillaume Sahuc & Gauthier Vermandel, 2022. "Environmental Subsidies to Mitigate Transition Risk," Swiss Finance Institute Research Paper Series 22-45, Swiss Finance Institute.
    4. Frederick Ploeg, 2023. "Fiscal Costs of Climate Policies: Role of Tax, Political, and Behavioural Distortions," De Economist, Springer, vol. 171(2), pages 119-137, June.
    5. Garth Day & Creina Day, 2022. "The supply-side climate policy of decreasing fossil fuel tax profiles: can subsidized reserves induce a green paradox?," Climatic Change, Springer, vol. 173(3), pages 1-19, August.

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    More about this item

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth

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