One reason why a global carbon tax is impossible

Consequently, from a regional perspective, there are large disagreements about the welfare effects of carbon taxes: when a uniform carbon tax is imposed across all regions, with revenues redistributed locally as a lump sum so that there are no interregional transfers, some regions gain and others lose, often by large amounts that swamp the globally-averaged benefits of carbon taxes.

The microfoundations of that claim are interesting:

At the regional level, the optimal annual average temperature (at which the calibrated inverse U -shape governing how labor productivity varies with temperature reaches its peak) is approximately 12 degrees Celsius (C); an increase of regional temperature from 10 C to 12 C increases a region’s total factor productivity (TFP) by about 1%, while a further increase in annual average temperature from 12 C to 14 C reduces its TFP by about 2%.

Here are some bottom-line numbers on the global costs of climate change, with and without a carbon tax regime:

Without taxes global GDP reaches its nadir (relative to trend) just after 2190, when it is about 7.3% below the trend that would have obtained starting in 1990 without further global warming. With taxes, global GDP reaches its nadir just before 2190, at about 5.5% below trend.

Again, the costs of climate change are a few years of global economic growth.  That is a big deal, and worth attending to, but far from an existential risk.

Here is the 160 pp. NBER working paper by Per Krusell and Anthony A. Smith Jr.


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