Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/77683
Year of Publication: 
2013
Series/Report no.: 
CESifo Working Paper No. 4285
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper focuses on two equity dimensions of climate policy, intra- and intergenerational equity, and analyzes the implications of equity preferences on climate policy, and on the production and consumption patterns in rich and poor countries. We develop a dynamic two-region model, in which each region suffers from local pollution and global warming, but also has an inequality aversion over current consumption allocations. Inequality aversion lifts the consumption path of the poor region, while the rich region must take a greater share of the climate burden. Furthermore, with inequality aversion, the optimal climate policy leads to higher investment in clean capital in the North and in dirty capital in the South, thereby allowing the South to pollute more and develop faster. The optimal policy may even require the poor region to increase emissions relative to the uncoordinated business-as-usual case. Introducing transfers between the regions reinforces these effects. However, loans to poor countries to reduce inequality may result in a debt crisis, and hence, debt remittance may be part of the optimal climate policy.
Subjects: 
intragenerational equity
intergenerational equity
inequality aversion
climate policy
economic development
international transfers
debt crisis
JEL: 
C63
D31
D63
Q54
Document Type: 
Working Paper
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