The Social Cost of Carbon in a Non-Cooperative World

61 Pages Posted: 11 Jul 2019 Last revised: 25 Jan 2021

See all articles by Christoph Hambel

Christoph Hambel

Tilburg University - Department of Econometrics & Operations Research

Holger Kraft

Goethe University Frankfurt

Eduardo S. Schwartz

University of California, Los Angeles (UCLA) - Finance Area; Simon Fraser University (SFU); National Bureau of Economic Research (NBER)

Date Written: January 25, 2021

Abstract

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.

Keywords: Climate change economics, Carbon abatement, Non-cooperative game, Differential game, Trade, DICE

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JEL Classification: D81, Q5, Q54, C73

Suggested Citation

Hambel, Christoph and Kraft, Holger and Schwartz, Eduardo S. and Schwartz, Eduardo S., The Social Cost of Carbon in a Non-Cooperative World (January 25, 2021). Available at SSRN: https://ssrn.com/abstract=3418249 or http://dx.doi.org/10.2139/ssrn.3418249

Christoph Hambel

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands

Holger Kraft (Contact Author)

Goethe University Frankfurt ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Eduardo S. Schwartz

Simon Fraser University (SFU) ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-1953 (Phone)
310-206-5455 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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