Essays on the Macroeconomics of Climate Change

University dissertation from Stockholm : Department of Economics, Stockholm University

Abstract: This thesis consists of three self-contained chapters dealing with different macroeconomic aspects of climate change.Chapter 2, "Technological Trends and the Intertemporal Incentives For Fossil-Fuel Use", analyses how (the expectations about) the future developments of different kinds of technology affect the intertemporal incentives for fossil-fuel use. I find that improvements in the future state of technologies for alternative-energy generation, energy efficiency and TFP all increase fossil-fuel use before the change takes place. The effect of changes in the efficiency of non-energy inputs is the reverse, while the effect of changes in fossil-fuel based energy technology is ambiguous. These conclusions are robust to a number of different possible variations of assumptions.Chapter 3, "The Role of the Nature of Damages", considers to what extent the choice of modeling climate impacts as affecting productivity, utility or the depreciation of capital affects the behavior of the model. I carry out my analysis in two different ways. Firstly, under some simplifying assumptions, I derive a simple formula for the optimal tax on fossil-fuel use that adds up the three different types of climate effects Secondly, I use a two-period model with exogenous climate to analyze how the allocation of fossil-fuel use over time is affected by the effects of climate change. I find there that this is sensitive to the assumptions made.Chapter 4, "Indirect Effects of Climate Change", investigates how direct effects of climate change in some countries have indirect effects on other countries going through changing world market prices of goods and financial instruments. When calculating the total effects of climate change these indirect effects must also be taken into account. I first derive these indirect effects in a many-country model. Reaching agreements about reductions in the emissions of greenhouse gases is made difficult by the negative correlation there seems to be between emissions of greenhouse gases and the vulnerability to climate change. I argue, based on a stylized two country example, that trade in goods will tend to make the countries' interests more aligned while trade in financial instruments will tend to make the countries' interests less aligned.

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