Resolving intergenerational conflict over the environment under the Pareto criterion
Torben M. Andersen,
Joydeep Bhattacharya and
Pan Liu
Journal of Environmental Economics and Management, 2020, vol. 100, issue C
Abstract:
Climate change policies create intergenerational winners and losers because the costs come first and the benefits later. In such cases, Kaldor-Hicks cost-benefit analysis seeks potential Pareto-improvements by showing the hypothetical potential for the winners to compensate the losers via lump-sum transfers. In their absence, once a costly climate policy is actually implemented, it unleashes distortions and general-equilibrium effects rendering unclear whether Kaldor-Hicks potential improvements lead to actual improvements. We study policies which, once implemented, would pass the Pareto test that no generation subsequent to policy action be made worse off than before. We develop a stylized climate-economy model in which production by the current generation generates pollution which “damages” production for future generations. Over time, the business-as-usual (BAU) economy gets increasingly polluted, consumption falls, and generational welfare levels decline. A government introduces costly pollution abatement and finances it via distorting taxes and the sale of debt (“green bonds”). Pollution levels start to decline, generating downstream welfare gains which may be taxed – without hurting anyone, in a Pareto sense – to help finance the policy and pay off the debt. Along the transition, every generation faces less pollution, consumes more and is happier than if life had continued in the BAU world.
Keywords: Pollution; Green bonds; Pareto criterion; Kaldor-Hicks; Cost-benefit analysis; Public debt; Overlapping generations; Environmental policy (search for similar items in EconPapers)
JEL-codes: H5 O44 Q56 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (10)
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Working Paper: Resolving intergenerational conflict over the environment under the Pareto criterion (2020)
Working Paper: Resolving Intergenerational Conflict over the Environment under the Pareto Criterion (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:100:y:2020:i:c:s0095069618306442
DOI: 10.1016/j.jeem.2019.102290
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