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Energy balance climate models and general equilibrium optimal mitigation policies

Authors
Journal
Journal of Economic Dynamics and Control
0165-1889
Publisher
Elsevier
Volume
37
Issue
12
Identifiers
DOI: 10.1016/j.jedc.2013.09.008
Keywords
  • Optimal Carbon Taxes
  • General Equilibrium
  • Energy Balance Climate Model

Abstract

Abstract In a general equilibrium model of the world economy, we develop a two-dimensional energy balance climate model featuring heat diffusion and anthropogenic forcing driven by global fossil fuel use across the sphere of the Earth. This introduces an endogenous location dependent temperature function, driving spatial characteristics, in terms of location dependent damages resulting from local temperature anomalies into the standard climate-economy framework. We solve the social planner's problem and characterize the competitive equilibrium for two polar cases differentiated by the degree of market integration. We define optimal taxes on fossil fuel use and how they may implement the planning solution. Our results suggest that if the implementation of international transfers across latitudes is not possible then optimal taxes are in general spatially non-homogeneous and may be lower at poorer latitudes. The degree of spatial differentiation of optimal taxes depends on heat transportation. By employing the properties of the spatial model, we show by numerical simulations how the impact of thermal transport across latitudes on welfare can be studied.

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