FEEM working papers "Note di lavoro" series
2012 .005

Energy Balance Climate Models and the Spatial Structure of Optimal Mitigation Policies


Authors: William Brock, Gustav Engstrom, Anastasios Xepapadeas
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Keywords: Energy Balance Climate Models, Heat Diffusion, Temperature Distribution, Spatial Optimal Taxes
JEL n.: Q54, Q58

Abstract

We develop a one-dimensional energy balance climate model with heat transportation across locations. We introduce the concept of potential world GDP at time t, and we introduce, through the temperature function, spatial characteristics into the damage function which make damages latitude dependent. We solve the social planner’s problem and characterize the competitive equilibrium. We define optimal taxes on fossil fuels and profit taxes on firms that extract fossil fuels. Our results suggest that if the implementation of international transfers across latitudes is not possible, then optimal taxes are spatially non homogeneous and tend to be lower at the poor latitudes. The degree of spatial differentiation of optimal taxes depend on heat transportation. We also locate sufficient conditions for optimal mitigation policies to have rapid ramp-up initially and then decrease over time. By employing the properties of the spatial model and approximating solutions, we show how to study the impact of thermal transport across latitudes on welfare inequality.

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