Dynamics of Global Emission Permit Prices and Regional Social Cost of Carbon under Noncooperation

We build a dynamic multi-region model of climate and economy with emission permit trading among 12 aggregated regions in the world. We solve for the dynamic Nash equilibrium under noncooperation, wherein each region adheres to the emission cap constraints following commitments outlined in the 2015 Paris Agreement. Our model shows that the emission permit price reaches $749 per ton of carbon by 2050. We demonstrate that a regional carbon tax is complementary to the global cap-and-trade system, and the optimal regional carbon tax is equal to the difference between the regional marginal abatement cost and the permit price.

This paper has been submitted and is currently available at Arxiv.