Can Economic Policy Mitigate Climate-Change?

In this research project we plan to analyze possible economic responses to climate change in a heterogeneous-agents, multi-region, stochastic general equilibrium model. Climate change, as well as carbon taxation, will have drastically different effects on aggregate production and consumption across different regions. Moreover, a lack of international risk sharing as well as high costs to migration imply that the predicted global warming can have much larger adverse effects than it would appear from a single-region model. An obvious policy response to global warming is a carbon tax which will naturally hurt some individuals and help others. We plan to compute the optimal carbon tax through time, as well as region- and cohort-specific side payments needed to make carbon taxation a global, that is to say, an inter-temporal, and inter-regional win-win. To do so in an accurate quantitative fashion, we will need to i) develop large-scale, multi-region dynamic stochastic economic models with overlapping generations that incorporate state-of-the-art climate physics, and ii) develop high-performance computing codes that are capable of solving such models on a human time scale. An essential aspect of the research project is to develop economic models that can help us to understand how researchers and society can tackle the significant uncertainties associated with climate change. In this context, we also plan to address the question of how new financial assets or new forms of social insurance systems can help to share climate risks and mitigate climate uncertainties. Our project lies at the intersection of economics, climate science, and computational science. The main questions we ask are economic questions. However, to model climate change appropriately, in particular in order to quantify regional differences and uncertainties associated with climate change we need to engage and interact heavily with the climate modeling community. To compute the effects of taxes and climate risks on individuals’ welfares we plan to develop a modular code framework, with one module to model the evolution of climate, one module that links changes in climate to economic damages, and one module that solves for prices and quantities in the economy. For this, we need to interact heavily with the computational science community.