22 May 2008

Speaking of Carbon

The March issue of Finance & Development (IMF) has many stories on global warming, carbon taxes, etc. Read the stories, and consider these pictures [click to view at full resolution]:



The picture above describes which countries will bear the costs of carbon reduction under different carbon trading systems. Note that allocation of permits on a per capita basis in a cap and trade system results in a slightly positive (!) economic impact, with most of the gains going to China. Carbon controls by taxes have the biggest, negative impact. All methods result in similar decreases of world GNP, i.e., about -0.6 percent. Not too much to ask to save the world, eh?



This picture shows that people closer to the equator will suffer more from global warming. They are, by and large, the poorer people.

Bottom Line: These pictures, and the models behind them, make a very useful contribution to the debate over "what to do" about global warming. The poor of the world will suffer the most, so poorer countries have an incentive to negotiate a global solution. The choice of solution matters because it will have different impacts on different countries. China, especially, does better with per capita allocation of emissions permits and the worst with a uniform carbon tax. That's disappointing to me (I am a tax fan), but it may indicate that the politically-expedient solution (get China on board) will be to implement permits on a world-wide basis. OTOH, we can see why rich countries may not care about a solution. The US, e.g., will not suffer as much from global warming, and per capita permit allocation is the "worst" option for the US. I wonder if it will be possible to overcome national selfishness and reach a global solution.

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