Climate Inequality: Carbon Capture for Redistribution

ABSTRACT

We study optimal climate policy in a global economy where regions differ in wealth and climate vulnerability. Carbon emissions from production lead to output losses, and there is a technology for carbon capture. We provide an aggregation result: the model with heterogeneity can be cast into a representative region economy with a different discount factor and damage function. This result offers a simple rule to account for inequality in the design of climate policy. We show that wealthier regions should bear more responsibility for carbon capture to reduce atmospheric carbon and that inequality per se does not entail a compromise on the global emissions target. It is only if regions must contribute uniformly to carbon capture that the optimal climate policy dictates higher global net emissions relative to the first best. Carbon capture serves as a natural redistribution mechanism precisely because lump‐sum transfers are unavailable.