Non-Cooperative and Cooperative Responses to Climate Catastrophes in the Global Economy: A North-South Perspective

The global response to a catastrophic shock to productivity which becomes more imminent with global warming is to have carbon taxes to curb the risk of a calamity and to accumulate precautionary capital to facilitate smoothing of consumption.  Our multi-region model of growth and climate change indicates that without international lump-sum transfers the cooperative global response to such stochastic tipping points requires converging carbon taxes for developing and developed regions.  Non-cooperative responses lead to a bit more precautionary saving and lower diverging carbon taxes.  Precautionary capital suffers less from international free-rider problems than the carbon taxes.  We illustrate the various outcomes with a calibrated North-South model of the global economy.