The 2015 Paris climate accord (Paris Agreement) is meant to control our planet’s rising temperature to limit climate change. But it may be doing the opposite in permitting a slow phase-in of CO2 emission mitigation. The accord asks its 195 national signatories to specify their emission reductions and to raise those contributions over time. However, there is no mechanism to enforce these pledges. This said, the accord puts dirty energy producers on notice that their days are numbered. Unfortunately, this “use it or lose it” message may accelerate the extraction and sale of fossil fuels and, thereby, permanently worsen climate change. Our paper uses a simple OLG model to illustrate this long-noted, highly troubling Green Paradox. Its framework properly treats climate damage as a negative externality imposed by today’s generations on tomorrow’s—an externality that is, in part, irreversible and, if large enough, can tip the climate to a permanently bad state. Our paper shows that delaying abatement can be worse than doing nothing. Indeed, it can make all generations worse off. In contrast, immediate policy action can make all generations better off. Finally, we question the standard use of infinitely lived, single-agent models to determine optimal abatement policy. Intergenerational altruism underlies such models. But its assumption lacks empirical support. Moreover, were such altruism widespread, effective limits on CO 2 emissions would, presumably, already be in place. Unfortunately, optimal abatement prescriptions derived from such models can differ, potentially dramatically, from those actually needed to correct the negative climate externality that today’s generations are imposing on tomorrow’s.
Heterogeneous consumption in OLG model with horizontal innovations
