Ashton Pallottini

Onset of Offsets: The Limits to Social Signaling in Eco-friendliness

Despite being a top concern for global welfare and equity, policymakers have struggled to implement taxes and subsidies to address climate change. I study a non-standard policy that publicizes purchases of carbon offsets, leveraging social rewards to increase uptake. I show in pilot data that publicity increases uptake by 20 percentage points (200%) among those who believe few others have ever purchased an offset but has null effect on those with middling views of carbon offset market shares. This implies that publicity can be an effective policy tool for mitigating climate change. It further has broader implications for optimal subsidies of other publicly visible prosocial actions. I show using a structural model that low-market-share optimal subsidies should be lower when social rewards exist than when they do not. This is because subsidies increase market share and thus crowd out social rewards. This effect is lessened as market shares become more moderate and the social rewards dissipate.

Thomas Bourany

The Optimal Design of Climate Agreements: Inequality, Trade and Incentives for Climate Policy

How can we design a climate agreement that implements the optimal climate policy? In the presence of inequality and policy constraints, the lack of climate cooperation and free-riding incentives are exacerbated. Through the lens of an Integrated Assessment Model (IAM) with heterogeneous countries and bilateral trade, I study the taxation of carbon when countries can deviate and exit climate agreements. Participation constraints create a policy tradeoff between an intensive margin — a “climate club” with few countries that implement large emission reductions — and an extensive margin — accommodating a larger number of countries at the cost of lowering the carbon tax. As in Nordhaus (2015), trade sanctions for non-participants are crucial to ensure the stability of the coalition. I solve for the optimal design of the club and show that with enough freedom in policy instruments — carbon tax and tariffs — one can reproduce the world’s optimal policy: high abatement and large tariffs that induce participation of the entire world. However, in the presence of additional policy constraints, e.g. WTO rules for Carbon Border Adjustments, it can be optimal to leave several developing economies outside of the climate agreement.