No country is an island: International cooperation and climate change

By Ferrari Massimo and Pagliari Maria Sole

http://d.repec.org/n?u=RePEc:bfr:banfra:815&r=dge

In this paper we explore the cross-country implications of climate-related mitigation policies. Specifically, we set up a two-country, two-sector (brown vs green) DSGE model with negative production externalities stemming from carbon-dioxide emissions. We estimate the model using US and euro area data and we characterize welfare-enhancing equilibria under alternative containment policies. Three main policy implications emerge: i) fiscal policy should focus on reducing emissions by levying taxes on polluting production activities; ii) monetary policy should look through environmental objectives while standing ready to support the economy when the costs of the environmental transition materialize; iii) international cooperation is crucial to obtain a Pareto improvement under the proposed policies. We finally find that the objective of reducing emissions by 50%, which is compatible with the Paris agreement’s goal of limiting global warming to below 2 degrees Celsius with respect to pre-industrial levels, would not be attainable in absence of international cooperation even with the support of monetary policy.

nice paper that highlights the importance of dynamic general equilibrium and transition costs for claimte change response. It shows that it is possible to reach climate goals and both fiscal and monetary tools are required. And, of course, international cooperation.