The political climate trap

Abstract

We develop a simple political-economic model of a climate trap. We apply our model to gasoline taxes, which vary dramatically across countries. Externalities cannot fully account for this. Our model shows that group interests, resulting from the composition of a country’s car fleet, can explain differences in gasoline taxes even among countries with identical fundamentals. Endogenous car ownership can yield multiple equilibria. This can lead to a political climate trap, where a low gasoline tax reflects the views of a majority, but another majority would benefit from transitioning to a high-tax equilibrium with fewer emissions.