Environmental Macroeconomics
Permit Trading Frictions, Co-Pollutants, and the Case for Cap-and-Trade with MinJung Kwak
Abstract
We develop an over-the-counter emissions trading model featuring intermediaries, search and bargaining frictions, firm-specific abatement costs, and localized co-pollutant damages. Permit prices, trading volume, and emissions distribution arise endogenously. We examine how market microstructure, abatement cost heterogeneity, and damage functions shape equilibrium outcomes. Contrary to Weitzman (1974), our model shows that cap-and-trade can outperform a carbon tax. The key reason is that trading frictions in the permit market compress the dispersion of emissions across firms, thereby reducing total damages from local co-pollutants. Calibrated to EU ETS data, the model predicts that optimizing dealer availability reduces deadweight loss to 83% of that under a uniform EU-wide carbon tax, given benchmark values for the discount rate and local environmental damage coefficients.
Long-Run Economic Impacts of Climate Variability with Sungwon Lee
Abstract
We estimate long-run economic impacts of climate volatility by employing a stochastic frontier model where climate volatility is additionally included into the production frontier. Our climate panel dataset covers 157 countries over the period 1950-2014. We find that both temperature and precipitation affect production possibilities in a hump-shaped way. Most importantly, temperature volatility turns out to reduce long-term potential output. This negative effect is found to be statistically significant, and various robustness checks, including income as well as temperature heterogeneity across nations, confirm it. We also find short-term weather anomalies, either temperature or precipitation, are found to be insignificant across all specifications. Our findings provide supporting empirical evidence for a growing body of Integrated Assessment Model literature, emphasizing the role of uncertainty about global temperature dynamics.
Monetary Economics