Faculty of Economics and Business Administration Publications Database

The social cost of carbon in a non-cooperative world

Hambel, Christoph
Schwartz, Eduardo
Volume: 131
Pages: 103490 -
ISSN-Print: 0022-1996
Link External Source: Online Version
Year: 2021
Keywords: Climate change economics; Carbon abatement; Non-cooperative game; Differential game; Trade; DICE

The recent literature has derived simple formulas for the Social Cost of Carbon (SCC) that are easy to interpret, but that only apply to the global economy. This is an issue since international transfers to sustain the global optimum with the same carbon price for all countries are still lacking after thirty years of climate summits. The main research objective of our paper is to obtain tractable analytical and interpretable formulas for the SCC, the optimal carbon taxes, and the optimal consumption-abatement strategies in a non-cooperative world. We find that the optimal taxes are proportional to national GDP and can be decomposed into a domestic and a foreign component where the latter stems from trade. Besides, heterogeneity in country-specific damage functions together with the size of international trade significantly affects the regional distribution of the SCC. Consequently, trade can also affect the total amount of carbon dioxide emitted into the atmosphere.