Global carbon price asymmetry

This paper studies a social planner who chooses countries' carbon prices so as to maximize global welfare. Product markets are characterized by firm heterogeneity, market power, and international trade. Because of the market-power distortion, the planner's optimal policy is second-best. The main insight is that optimal carbon prices may be highly asymmetric: zero in some countries and above the social cost of carbon in countries with relatively dirty production. This result obtains even though a uniform global carbon price is always successful at reducing countries' emissions. Competition policy that mitigates market power may enable stronger climate action.

Automated summary

This paper examines how a social planner can choose carbon prices in different countries to maximize global welfare. The study finds that optimal carbon prices can be highly asymmetric and competition policy that mitigates market power can enable stronger climate action.