Abstract
Despite worldwide policy efforts such as the Kyoto Protocol, the emission of greenhouse gases (GHG) remains a negative externality. Economic equilibrium paths in the presence of such an uncorrected externality are inefficient; as a consequence there is no real economic opportunity cost to correcting this externality by mitigating global warming. Mitigation investment using resources diverted from conventional investments can raise the economic well-being of both current and future generations. The economic literature on GHG emissions misleadingly focuses attention on the intergenerational equity aspects of mitigation by using a hybrid constrained optimal path as the “business-as-usual” benchmark. We calibrate a simple Keynes-Ramsey growth model to illustrate the significant potential Pareto-improvement from mitigation investment, and to explain the equilibrium concept appropriate to modeling an uncorrected negative externality.
We received helpful comments from Larry Karp and an anonymous referee. Support from the Schwartz Center for Economic Policy Analysis is gratefully acknowledged.
Originally published in Economic Theory, Volume 49, Number 2, February 2012 DOI 10.1007/ s00199-010-0573-7.
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- 1.
The worldwide economic implications of climate change are hard to quantify. This task becomes more difficult, the higher the assumed stock of carbon in the atmosphere. The report of the IPCC (2007) presents convincing evidence for the negative relationship between GDP and global warming. Tol (2009) gives an optimistic review.
- 2.
Shiell and Lyssenko (2008) offers a clear explanation of the logic supporting this point, in the context of a two-state variable model very similar to the present one. This paper also presents an ingenious alternative method to ours of computing approximate BAU paths. Shiell and Lyssenko also find that the asymptotic behavior of COPT and BAU paths is very similar. Because they do not focus on the initial transient levels of consumption on the OPT and BAU paths, however, their discussion does not bring out the critical role of the COPT path in suggesting that an intergenerational distributional tradeoff is at the center of global-warming policy evaluations.
- 3.
On the relation between \(\rho \) and \(\eta \) and intergenerational equity, see Arrow (2007), who emphasizes the public good nature of global warming, without, however, noting the inefficiency of the BAU path.
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- 5.
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Rezai, A., Foley, D.K., Taylor, L. (2016). Global Warming and Economic Externalities. In: Chichilnisky, G., Rezai, A. (eds) The Economics of the Global Environment. Studies in Economic Theory, vol 29. Springer, Cham. https://doi.org/10.1007/978-3-319-31943-8_20
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