Abstract

It is often stated that optimal global climate policy requires global harmonization of marginal abatement costs – i.e., a single carbon price throughout the world. Chichilnisky and Heal (1994) have shown quite generally that this is only the case if distributional issues are ignored, or if lump-sum transfers are made between countries. Else, a policy in which different regions face different carbon prices may be superior to one with a single global carbon price from a welfare point of view. Still, most integrated assessment models (IAMs) assume away distributional issues and report a single optimal carbon price. We calculate utilitarian-optimal carbon prices under zero cross-regional lump-sum transfers in the multi-region IAM NICE. The result is optimal global climate policy with different regional carbon prices in which the poorest regions face initially low prices, while the richest regions face very high prices from the outset. This entails significant welfare gains over the standard single price optima commonly reported, which, as we argue briefly in conclusion, can be improved upon still by allowing international trading in the corresponding emissions allocations.