Selfish incentives for climate policy: Empower the young!

Abstract

Currently living agents might have selfish reasons to undertake climate policy, because young agents benefit in the future from an improved climate, and policy affects the asset price. Previous models downplayed the first factor and assumed away the second. Self-interested incentives induce meaningful climate policy over a period of several generations, if the young have substantial policy-making influence. Policy is largely driven by the young generation’s concern about its future consumption, not from endogenous asset prices. For small climate policy, the old and young generations’ incentives are aligned if and only if the elasticity of intertemporal substitution exceeds 1.

Keywords: Climate externality, overlapping generations, climate policy, generational conflict, Markov perfection, adjustment costs; concave production possibility frontier

JEL Classification: E24, H23, Q20, Q52, Q54