VGSF - WU Vienna - LC

Eduardo Schwartz, UCLA

Campus WU D3.0.225 11:00 - 12:30

Organizer VGSF

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes Eduardo Schwartz from UCLA to present his re­search pa­pers.
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The Car­bon Abate­ment Game

Cli­mate change is con­sidered as one of the ma­jor global chal­lenges. Al­though coun­tries past and fu­ture con­tri­bu­tions to the ac­cu­mu­la­tion of green­house gases in the at­mo­sphere are dif­fer­ent, all coun­tries are af­fected, but not ne­ces­sar­ily in the same way (e.g. rising sea levels). This is the reason why it is so hard to reach global agree­ments on this mat­ter. We study this is­sue in a dy­namic game-­the­or­et­ical model (stochastic dif­fer­en­tial game) with mul­tiple coun­tries that are open econom­ies, i.e. we al­low for in­ter­na­tional trade between the coun­tries. Our frame­work in­volves stochastic dy­nam­ics for CO2-e­mis­sions and eco­nomic out­put of the coun­tries. Each coun­try is rep­res­en­ted by a re­curs­ive-­pref­er­ence func­tional. Des­pite its com­plex­ity, the model is tract­able and we can quan­tify each coun­try's de­cision on con­sump­tion, in­vest­ment, car­bon abate­ment and the so­cial cost of car­bon, ex­pli­citly. One key find­ing is that both the coun­try-spe­cific and global so­cial cost of car­bon are in­creas­ing in the trade volume. This res­ult is ro­bust to ad­ding cap­ital trans­fers between coun­tries. Our nu­mer­ical examples sug­gest that dis­reg­ard­ing trade might lead to a sig­ni­fic­ant un­der­es­tim­a­tion of the SCC.

Op­timal Car­bon Abate­ment in a Stochastic Equi­lib­rium Model with Cli­mate Change

This pa­per stud­ies a dy­namic stochastic gen­eral equi­lib­rium model in­volving cli­mate change. Our frame-­work al­lows for feed­back ef­fects on the tem­per­at­ure dy­nam­ics. We are able to match es­tim­ates of fu­ture tem­per­at­ure dis­tri­bu­tions provided in the fifth assess­ment re­port of the IPCC (2014). We com­pare two ap­proaches to cap­ture dam­aging ef­fects of tem­per­at­ure on out­put (level vs. growth rate im­pact) and com­bine them with two de­grees of sever­ity of this dam­age (Nord­haus vs. Weitzman cal­ib­ra­tion). It turns out that the choice of the dam­age func­tion is cru­cial to answer the ques­tion of how much the dis­tinc­tion between level and growth rate im­pact mat­ters. The so­cial cost of car­bon is sim­ilar for frame­works with level or growth rate im­pact if the po­ten­tial dam­ages of global warm­ing are mod­er­ate. On the other hand, they are more than twice as large for a growth rate im­pact if dam­ages are pre­sum­ably severe. We also study the ef­fect of vary­ing risk aver­sion and elasti­city of in­ter­tem­poral sub­sti­tu­tion on our res­ults. If dam­ages are mod­er­ate for high tem­per­at­ures, risk aver­sion only mat­ters when cli­mate change has a level im­pact on out­put, but the ef­fects are re­l­at­ively small. By con­trast, the elasti­city of in­ter­tem­poral sub­sti­tu­tion has a sig­ni­fic­ant ef­fect for both level and growth rate im­pact. If dam­ages are po­ten­tially severe for high tem­per­at­ures, then the res­ults also be­come sens­it­ive to risk aver­sion for both dam­age spe­cific­a­tions.

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