Correcting the Climate Externality: Pareto Improvements Across Generations and Regions

Many argue that the present generation must reduce consumption to mitigate future climate change. However, as significant climate change is due to market failure, the correction of market failures, by definition, gives rise to the possibility of Pareto improvements. In this paper, we examine the implications of Pareto improvements both within and across generations. We employ the representative consumer model RICE-10 (a global model including different regions) to see how we could potentially distribute any benefits across and within generations such that nobody loses. The model shows that different combinations of present and future consumption along the Pareto-improving frontier yield different combinations of capital investment and emissions. We also calculate a conventional social optimum. While the social optimum, by definition, is on the Pareto efficiency frontier, it is not necessarily on the Pareto-improving segment of this frontier. Total emissions, and hence temperature change, vary significantly across different Pareto-improving scenarios. It obviously matters which generations get the utility gain, and one of our results is that for Pareto improvements where none of the gain goes to the distant future, and allowing transfers, total emissions will be higher than in the social optimum. Even without any welfare gain to the distant future, total emissions may be lower in the Pareto-improving scenarios we have considered than under the social optimum if transfers are not permitted. Moreover, in this case, carbon taxes differ substantially across regions for all Pareto improvements.