No country is an island: international cooperation and climate change

Maria Sole Pagliari and Massimo Ferrari Minesso

No 2568, Working Paper Series from European Central Bank

Abstract: In this paper we explore the cross-country implications of climate-related mitigation policies. Specifically, we set up a two-country, two-sector (brown vs green) DSGE model with negative production externalities stemming from carbon-dioxide emissions. We estimate the model using US and euro area data and we characterize welfare-enhancing equilibria under alternative containment policies. Three main policy implications emerge: i) fiscal policy should focus on reducing emissions by levying taxes on polluting production activities; ii) monetary policy should look through environmental objectives while standing ready to support the economy when the costs of the environmental transition materialize; iii) international cooperation is crucial to obtain a Pareto improvement under the proposed policies. We finally find that the objective of reducing emissions by 50%, which is compatible with the Paris agreement's goal of limiting global warming to below 2 degrees Celsius with respect to pre-industrial levels, would not be attainable in absence of international cooperation even with the support of monetary policy. JEL Classification: F42, E50, E60, F30

Keywords: climate modelling; DSGE model; open-economy macroeconomics; optimal policies (search for similar items in EconPapers)
Date: 2021-06
New Economics Papers: this item is included in nep-agr, nep-cba, nep-dge, nep-ene, nep-env, nep-mac, nep-opm and nep-res
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Citations: View citations in EconPapers (21)

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Related works:
Journal Article: No country is an island. International cooperation and climate change (2023)
Working Paper: No country is an island. International cooperation and climate change (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212568

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