Working Papers

"Win as a Team or Fail as Individuals - Cooperation and Non-Cooperation in the Climate Tax Game"

Author(s): Marten Hillebrand, Elmar Hillebrand
Download Paper
This paper studies the strategic interaction of arbitrarily many heterogeneous regions in a macroeconomic growth model of climate change. Regions differ with respect to production technologies, productivity and factor endowments, stocks of fossil fuels, and climate damages. They trade on friction-less international markets for capital and fossil fuels and choose climate tax policies under different scenarios of cooperation and non-cooperation. We derive closed form solutions of optimal policies for both the non-cooperative equilibrium where regions internalize only domestic climate damages and the efficient solution internalizing global climate damages. We extend all these results to cases with partial cooperation where regions form coalitions and choose policies to maximize welfare of their coalition. Finally, we study how transfers can incentivize regions to cooperate and determine a class of optimal transfer schemes under which all regions are better-off under full co- operation relative to the non-cooperative outcome. Numerical simulations based on calibrated parameter values are used to illustrate and quantify our theoretical results under different coalition scenarios.

"Does Idealistic Investment Behavior Promote Green Growth? A General Equilibrium Perspective"

"Who Pays the Bill? Climate Change, Taxes, and Transfers in a Multi-Region Growth Model"

Author(s): Marten Hillebrand, Elmar Hillebrand
Download Paper
This paper presents a quantitative study of a dynamic climate-economy model with multiple regions to evaluate how implementing an optimal climate tax affects production, emissions, and welfare in each region. We develop a numerical algorithm which is generally applicable to compute equilibria in the presence of arbitrarily many regions and under alternative climate policies. Our simulation model distinguishes six major world regions and incorporates a wide array of regional heterogeneities including a detailed description of the energy production process in each region. We also quantify the full range of Pareto-improving transfers under which each region has an incentive to join the global climate agreement. Our results show that optimal taxation reduces coal consumption in each region substantially by about 70% and leads to higher GDP within the next 100 years in most regions. The only exception is China which suffers losses in GDP for the next 130 years due to its strong dependence on coal and must be incentivized via transfer payments to implement the optimal tax. We also show that the increase in global temperature under optimal taxation is compatible with the two-degree target.

"Network Exposure in the Propagation of the COVID-19 Pandemic"