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Global warming and economic externalities

Abstract

Despite worldwide policy efforts such as the Kyoto Protocol, the emission of greenhouse gases (GHG) remains a negative externality. Economic equilibrium paths in the presence of such an uncorrected externality are inefficient; as a consequence, there is no real economic opportunity cost to correcting this externality by mitigating global warming. Mitigation investment using resources diverted from conventional investments can raise the economic well-being of both current and future generations. The economic literature on GHG emissions misleadingly focuses attention on the intergenerational equity aspects of mitigation by using a hybrid constrained optimal path as the “business-as-usual” benchmark. We calibrate a simple Keynes-Ramsey growth model to illustrate the significant potential Pareto improvement from mitigation investment and to explain the equilibrium concept appropriate to modeling an uncorrected negative externality.

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Correspondence to Armon Rezai.

Additional information

We received helpful comments from Larry Karp and an anonymous referee. Support from the Schwartz Center for Economic Policy Analysis is gratefully acknowledged.

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Rezai, A., Foley, D.K. & Taylor, L. Global warming and economic externalities. Econ Theory 49, 329–351 (2012). https://doi.org/10.1007/s00199-010-0592-4

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Keywords

  • Global warming
  • Growth with negative externalities
  • Optimal economic growth

JEL Classification

  • D62
  • O41
  • Q54