Fair Share of GDP to Mitigate Climate Change Costs (according to DICE)

Fries, Christian P. (2024): Fair Share of GDP to Mitigate Climate Change Costs (according to DICE).

Abstract

This paper investigates the fair share of GDP required to mitigate climate change costs, using an extended DICE model. A dedicated fund, supplied annually by a fixed fraction of GDP, is introduced to cover abatement and damage costs.

Numerical analysis reveals that a funding rate of 2.4% of GDP is sufficient to meet all costs, enabling faster early abatement and reducing total emissions significantly. The proposed approach promotes intergenerational equity by distributing climate-related costs evenly across generations, overcoming the classical DICE model's limitations.

We investigate the interplay of the model's discount rate and the required funding rate. For low to moderate discount rates the required funding rate is largely independent of the discount rate, while high discount rate lead to higher funding rates as nominal cost increase.

• Item Type: MPRA Paper
• Language: English
• Keywords: Integrated Assessment Models; CO2-Price; Social Cost of Carbon; Interest Rate of Carbon; Intergenerational Equity; GDP
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E17 - Forecasting and Simulation: Models and Applications; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate ; Natural Disasters and Their Management ; Global Warming

References

[1] Betty C. Daniel and Christos Shiamptanis. “Pushing the limit? Fiscal policy in the European Monetary Union”. In: Journal of Economic Dynamics and Control 37.11 (Nov. 2013), pp. 2307–2321. ISSN: 0165-1889. DOI: 10.1016/j.jedc. 2013.06.003. URL: https://www.sciencedirect.com/science/ article/pii/S0165188913001358 (visited on 12/07/2023).

[2] Christian P. Fries. “Implied CO2-Price and Interest Rate of Carbon”. In: SSRN (2023). DOI: 10.2139/ssrn.3284722.

[3] Christian P. Fries and Lennart Quante. “Accounting for Financing Risks improves Intergenerational Equity of Climate Change Mitigation”. In: SSRN (2023). DOI: 10.2139/ssrn.4661050.

[4] Christian P. Fries and Lennart Quante. “Intergenerational Equity in Models of Climate Change Mitigation: Stochastic Interest Rates introduce Adverse Effects, but (Non-linear) Funding Costs can Improve Intergenerational Equity”. In: SSRN (2023). DOI: 10.2139/ssrn.4005846.

[5] Christian Gollier and Martin L. Weitzman. “How should the distant future be dis- counted when discount rates are uncertain?” In: Economics Letters 107.3 (2010). Publisher: Elsevier B.V., pp. 350–353. ISSN: 01651765. DOI: 10.1016/j. econlet.2010.03.001. URL: http://dx.doi.org/10.1016/ j.econlet.2010.03.001.

[6] Cameron Hepburn and Wilfred Beckerman. “Ethics of the Discount Rate in the Stern Review on the Economics of Climate Change”. In: World Economics 8.1 (Feb. 2007), pp. 187–210.

[7] Herman Matthijs. “The funding of the NATO”. In: Journal of Power, Politics & Governance 3.1 (2015), pp. 47–62.

[8] W. D. Nordhaus. “Revisiting the social cost of carbon”. In: Proceedings of the Na- tional Academy of Sciences of the United States of America 114 (2017), pp. 1518– 1523. DOI: 10.1073/pnas.1609244114. URL: https://doi.org/10. 1073/pnas.1609244114.

[9] Dinah Walker. Trends in US military spending. JSTOR, 2012. URL: https:// www.cfr.org/report/trends-us-military-spending.