SEM217: Robert Anderson, UC Berkeley: General Equilibrium and Climate Change

Tuesday, September 14th @ 11:00-12:30 PM (ONLINE)

General Equilibrium and Climate Change

Robert Anderson, UC Berkeley

ABSTRACT: General Equilibrium (GE) models are the most natural economic models for studying policies to mitigate human-induced climate change. In particular, they provide a setting in which we can analyze the effects on income distribution of climate mitigation policies such as carbon taxes or cap-and-trade, and develop policies to offset the income distribution effects. Most economic models of climate change are partial equilibrium, and thus have a limited ability to address the effects of climate mitigation policies on income distribution.

However, existing GE models rely on assumptions that are problematic in the context of CO 2 emissions. For example, many GE models assume free disposal in production, which precludes any control or pricing of CO 2 emissions; we drop that assumption. GE assigns “ownership”of commodities, but “ownership” as it is understood in GE does not require that the “owner” of CO 2 dispose of it. We address this problem by focusing on Net Additions to Atmospheric CO 2 (NAACO) as the relevant commodity, viewing it as a byproduct of the production process that can be capped or taxed, rather than as a commodity whose “owner” is free to release it. Many GE models treat CO 2 as a negative externality associated with the production of other goods, and give incentives to reduce emissions only through reducing the quantity of other goods produced, but this ignores the fact that different production processes for a single good (e.g. generated electricity) may have vastly different carbon intensities. The NAACO formulation separates the pricing of the goods (based on their consumption value to consumers) from the pricing of the emissions that are generated in their production, and thus provides incentives through equilibrium prices for the adoption of greener production technologies. GE models with a finite number of agents typically assign ownership of pollution to a small subset of the population, and it is doubtful whether this small group has the capability to absorb the pollution; in practice, much of it is probably released into the environment. We impose some discipline on this tendency through a model with a measure space of consumers, in which the integrability requirement inherent in the model limits the ability to transfer pollution to a small fraction of the population, and classifies the excess as pollution released into the environment.