Climate Policy Under National Commitments and Global Economic Shocks

Abstract

Global economic shocks may affect countries' Nash equilibrium contributions to emissions reduction efforts. We study the effect of income uncertainty on emissions reduction under different scenarios of national commitment targets. Our results show that in the presence of uncertainty, the framing of emissions reduction targets has implications for total emissions reduction and ex-ante welfare. Under the plausible assumption of “prudence,” higher global uncertainty tends to reduce equilibrium climate contributions if countries commit to a fixed cap for damage reductions before the income uncertainty is resolved. In contrast, if countries are committed to allocating a proportion of income to climate protection, ex-ante welfare may be higher than in the baseline case of no commitments.