Optimal Carbon Prices in an Unequal World: The Role of Regional Welfare Weights

TL;DR

This paper explores how regional welfare weights influence optimal global carbon prices, showing that accounting for inequality generally leads to lower emissions and different pricing strategies.

Contribution

It develops a theoretical framework linking inequality considerations to optimal carbon pricing and demonstrates their impact through calibrated simulations.

Findings

Accounting for inequality reduces optimal emissions by 21% with regional prices.

Uniform carbon prices increase by 15% when inequality is considered.

Theoretical results connect welfare weights to preferences over climate policy stringency.

Abstract

How should nations price carbon? This paper examines how the treatment of global inequality, captured by regional welfare weights, affects optimal carbon prices. I develop theory to identify the conditions under which accounting for differences in marginal utilities of consumption across countries leads to more stringent global climate policy in the absence of international transfers. I further establish a connection between the optimal uniform carbon prices implied by different welfare weights and heterogeneous regional preferences over climate policy stringency. In calibrated simulations, I find that accounting for global inequality reduces optimal global emissions relative to an inequality-insensitive benchmark. This holds both when carbon prices are regionally differentiated, with emissions 21% lower, and when they are constrained to be globally uniform, with the uniform carbon price 15% higher.