Nicholas Lawson (UQàM)

TITRE :  Passing the Buck(s): Welfare-Improving International Emission-Reduction Subsidies

Résumé : Climate change is the most important environmental issue facing the world today, and yet it has proven difficult to achieve international cooperation in solving this massive global externality. My paper proposes an alternative approach based on a unilateral emissions-reduction subsidy offered to poor countries by a rich country. I start with a simple two-country model in which a rich country and a poor country choose their emissions and experience the damages caused by the resulting temperature increase. Assuming that the rich country is the Stackelberg leader, I calibrate the model to data from a variety of sources, where I model the OECD as the rich country and non-OECD countries as the poor country. I show that a selfish rich country would choose to offer a large subsidy per unit of total emissions reduction by the poor country, amounting to more than $1 trillion dollars per year. Such a subsidy policy would significantly reduce emissions by the poor country, dramatically lowering the global temperature increase, and could even raise global welfare above that of any climate treaty that excludes international transfers, because it reduces both emissions and poverty. These results are largely robust to extensions of the model to settings with multiple poor and rich countries.