The rich, the poor, and the carbon tax

Abstract. Recent empirical evidence reveals an income gradient in support for climate action: individuals in wealthier countries are less willing to pay, as a percentage of their income, than those in poorer countries. What explains this gradient, and what does it imply for international cooperation to protect the Earth’s climate? We answer these questions using a heterogeneous-country integrated assessment model formulated as a mean field game and calibrated to historical economic and climate data. Poorer countries, facing higher marginal utility of consumption, cut consumption less to cushion the decline in capital accumulation caused by climate damages. As a result, they suffer larger relative losses from climate change over time and gain more from mitigation, making them more inclined to accept a global carbon tax. This gradient has stark implications for cooperation: even when a carbon tax large enough to contain temperature increases benefits most countries, the richest might oppose. Redistributing global carbon tax proceeds uniformly across countries or recycling them as green investment subsidies need not overcome this reluctance.
JEL Codes: C61, H23, Q50.
Keywords: Neoclassical Growth Model; Mean Field Game; Climate Policy.