Ruhr Economic Papers

Ruhr Economic Papers #925

Accounting for Inequality Aversion Can Justify the 2° C Goal

by Marco Rogna and Carla Vogt

RWI, 10/2021, 34 S./p., 8 Euro, ISBN 978-3-96973-082-9 DOI: 10.4419/96973082

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Abstract

Impact assessment models are a tool largely used to investigate the benefit of reducing polluting emissions and limiting the anthropogenic mean temperature rise. However, they have been often criticised for suggesting low levels of abatement. Countries and regions, that are generally the actors in these models, are usually depicted as having standard concave utility functions in consumption. This, however, disregards a potentially important aspect of environmental negotiations, namely its distributive implications. The present paper tries to fill this gap assuming that countries\regions have Fehr and Schmidt (1999) (F&S) utility functions, specifically tailored for including inequality aversion. Thereby, we propose a new method for the empirical estimation of the inequality aversion parameters by establishing a link between the well known concept of elasticity of marginal utility of consumption and the F&S utility functions, accounting for heterogeneity of countries/regions. By adopting the RICE model, we compare its standard results with the ones obtained introducing F&S utility functions, showing that, under optimal cooperation, the level of temperature rise is significantly lower in the last scenario. In particular, in the last year of the simulation, the optimal temperature rise is 2.1° C. Furthermore, it is shown that stable coalitions are easier to be achieved when F&S preferences are assumed, even if the advantageous inequality aversion parameter (altruism) is assumed to have a very low value. However, self–sustaining coalitions are far from reaching the environmental target of limiting the mean temperature rise below 2° C despite the adoption of F&S utility functions.

JEL-Classification: C72, D63, Q54

Keywords: Abatement; climate policy; inequality aversion; Paris agreement; RICE model

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