International Business | Climate Change

The social cost of carbon in a non-cooperative world

Do you wonder how the world can make meaningful progress in the fight against climate change when no country is willing to take the lead? The problem seems to stem from the fact that while the world benefits from reduced greenhouse gas emissions, a single country pays the cost. As a result, leaders have little incentive to take drastic action for fear of sabotaging their own economy. It is a confusing problem that many economic models have struggled to represent accurately—until now.

SFU Beedie Professor Eduardo Schwartz and his co-authors, Christoph Hambel and Holger Kraft tackle this problem in their paper, The Social Cost of Carbon in a Non-Cooperative World, recently published in the Journal of International Economics. Their research marks a significant shift in thinking and takes foreign trade into account to produce an analytically tractable—that is, solvable—model of the social cost of carbon.

“You can think of the social cost of carbon as a reflection of the future damages caused by pumping greenhouse gasses into the atmosphere,” says Schwartz. “It can be best understood as an optimal carbon tax that accounts for and offsets the resulting damages.”

Broadly speaking, social cost of carbon models are made up of three components for which a country’s GDP can be used—consumption, investment in capital, and carbon abatement. Schwartz’s paper is unique in that it establishes an equation to get the mix of those three components right—while also accounting for the effects of foreign trade.

In other models, countries are often modelled as autarkies—self-sufficient economic systems with limited trade—which is not representative of reality. Countries differ in the degree to which they produce and suffer damage from carbon emissions and how trade volume affects their social cost of carbon. Schwartz’s work has determined that the optimal carbon tax is proportionate to a country’s GDP and can be decomposed into domestic and trade elements.

Although a country may produce low carbon emissions, it can contribute to global emissions by trading with high-emission countries. As a result, higher trade volumes between these two countries mean that the high carbon emitter has more influence on the low carbon emitter’s optimal carbon tax—and Schwartz’s model solves this problem.

It is nice to see developments like this model that may help the world pull together to solve our most severe problem. The past year in British Columbia and around the world indicates that we are in for a wild ride on the climate change rollercoaster.