Regional Climate Change Policy under Positive Feedbacks and Strategic Interactions

The surface albedo feedback along with heat and moisture transport from the Equator to the Poles, are associated with polar amplification which is a well-established scientific fact. The present paper extends Brock and Xepapadeas (2017) to a non-cooperative framework with polar amplification, where regions decide emissions by maximizing own welfare. This can be regarded as a case of regional non-cooperation regarding climate change. Open loop and feedback solutions are derived and compared, in terms of temperature paths and welfare, with the cooperative solution. Carbon taxes which could bridge the gap between cooperative and non-cooperative emissions path are also derived. Finally, the framework is extended to a Ramsey set-up in which it is shown how the regional climate model can be coupled with standard optimal growth models. Numerical simulations confirm the theoretical results and provide insights about the size and the direction of deviations between the cooperative and the non-cooperative solutions. JEL Classification: Q54 Q58