Armon Rezai

The Political Economy of Environmental Policy with Overlapping Generations

A two‐sector overlapping generations model illuminates the intergenerational effects of a tax that protects an environmental stock. A traded asset capitalizes the economic returns to future tax‐induced environmental improvements, benefiting the current asset owners, the old generation. Absent a transfer, the tax harms the young generation by decreasing their real wage. Future generations benefit from the tax‐induced improvement in environmental stock. The principal intergenerational conflict arising from the tax is between generations alive at the time society imposes the policy, not between generations alive at different times. A Pareto‐improving tax can be implemented under various political economy settings.

Intergenerational Inequality Aversion, Growth, and the Role of Damages: Occam's Rule for the Global Carbon Tax

We derive a simple rule for a nearly optimal carbon tax that can be implemented and tested in a decentralized market economy. Our simple rule depends on the effect of the pure rate of time preference, growth, and intergenerational inequality aversion and basic parameters of the carbon cycle, but also on any adverse effects of global warming on economic growth and mean reversion in climate damages. The performance of the simple rule is excellent and yields only negligible welfare losses compared with the true welfare optimum under a wide range of perturbations including some extreme runs designed to severely road test the rule. Our IAM allows for scarce fossil fuel and endogenous energy transitions and generates cumulative carbon emissions and stranded assets which are also well predicted by our rule.

The Opportunity Cost of Climate Policy: A Question of Reference

The cost of climate policy depends on the no-policy alternative without which the opportunity cost of climate action cannot be determined. This reference path has to reflect the current failure in the market for carbon emissions: due to a negative externality, private investment decisions do not consider the climate damage they entail; agents overinvest in conventional capital and underinvest in climate capital. Internalization of climate damage lowers the private return to capital; agents reduce investment in favor of mitigation and consumption. Optimal climate mitigation increases welfare of the present and the future. Simulation of the inefficient no-policy scenario in DICE-07 confirms that this point numerically. (authors abstract)

Abandoning Fossil Fuel: How Fast and How Much?

Climate change must deal with two market failures, global warming and learning by doing in renewable use. The social optimum requires an aggressive renewables subsidy in the near term and a gradually rising carbon tax which falls in long run. As a result, more renewables are used relative to fossil fuel, there is an intermediate phase of simultaneous use, the carbonfree era is brought forward, more fossil fuel is locked up and global warming is lower. The optimal carbon tax is not a fixed proportion of world GDP. The climate externality is more severe than the learning by doing one.

Goodwin Cycles, Distributional Conflict and Productivity Growth

A combination of an investment-driven macroeconomy and a conflictdetermined income distribution gives cyclical behavior. Models of wage-price inflation can be nested in the Goodwinian tradition. Endogenous technical change has ambiguous effects on equilibrium: Kaldor-Verdoorn effects increase the wage share’s responsiveness to changes in output, while labor-saving technical change reduces it.

RECAST THE DICE AND ITS POLICY RECOMMENDATIONS

The DICE (for Dynamic Integrated model of Climate and the Economy) introduced two important policy aspects to the economic discussion of global warming. First, it argues for a “climate-policy ramp†that deems back-loading of mitigation optimal. Second, it demonstrates that an intergenerational tradeoff is at the heart of the mitigation problem. In this paper we argue that both of these findings rest on contestable assumptions. To demonstrate this a recast DICE is presented. Its outcomes show that DICEs predictions are not robust with higher migitations earlier on and slower temperature increases along the optimal path. The adoption of a baseline scenario in which pollution is a negative externality makes mitigating climate change a Pareto improvement. The alleged sacrifice of present generations vanishes. This strengthens the case for immediate policy action.

The Political Economy of EnvironmentalPolicy with Overlapping Generations

A two‐sector overlapping generations model illuminates the intergenerational effects of a tax that protects an environmental stock. A traded asset capitalizes the economic returns to future tax‐induced environmental improvements, benefiting the current asset owners, the old generation. Absent a transfer, the tax harms the young generation by decreasing their real wage. Future generations benefit from the tax‐induced improvement in environmental stock. The principal intergenerational conflict arising from the tax is between generations alive at the time society imposes the policy, not between generations alive at different times. A Pareto‐improving tax can be implemented under various political economy settings.

Cycles of demand and distribution and monetary policy in the U.S. economy

The role of monetary policy in the cyclical behavior of the labor share and capacity utilization in the U.S. economy is studied empirically. Previous estimation results remain robust; the inclusion of the rate of interest does not alter the underlying specification of the distributive demand regime. The role of monetary policy in net borrowing flows for four institutional sectors is analyzed. Interest rate effects appear most important for households. Based on this finding, implications for countercyclical stabilization policy are spelled out.

Economic Growth and Climate Change: Cap-And-Trade or Emission Tax?

Economic growth and the globalization of goods and capital flows led to an unsustainable level in the consumption of natural resources. This entailed a steady increase of pollution and climate change. The work of the Intergovernmental Panel of Climate Change (IPCC) was crucial in the dissemination of these findings and in the discussion leading to the Kyoto Protocol (IPCC 2006, 2007). One of the protocol’s controversial aspects was the choice of policy instruments in the curbing of carbon emissions. Generally speaking, two approaches seem to be favored: „cap-and-trade“ implying a trading of emission rights and „carbon tax“ implying a taxation of emissions.

Simple Rules for Climate Policy and Integrated Assessment

A simple integrated assessment framework that gives rules for the optimal carbon price, transition to the carbon-free era and stranded carbon assets is presented, which highlights the ethical, economic, geophysical and political drivers of optimal climate policy. For the ethics we discuss the role of intergenerational inequality aversion and the discount rate, where we show the importance of lower discount rates for appraisal of longer run benefit and of policy makers using lower discount rates than private agents. The economics depends on the costs and rates of technical progress in production of fossil fuel, its substitute renewable energies and sequestration. The geophysics depends on the permanent and transient components of atmospheric carbon and the relatively fast temperature response, and we allow for positive feedbacks. The politics stems from international free-rider problems in absence of a global climate deal. We show how results change if different assumptions are made about each of the drivers of climate policy. Our main objective is to offer an easy back-on-the-envelope analysis, which can be used for teaching and communication with policy makers.