Optimal Carbon Taxes and Foreign Aid
Working paper
![Thumbnail](/ssb-xmlui/bitstream/handle/11250/3132413/DP1012.pdf.jpg?sequence=5&isAllowed=y)
View/ Open
Date
2024-05Metadata
Show full item recordCollections
- Discussion Papers [1003]
Abstract
This article explores whether altruistic preferences toward households in poor high-temperature
countries stimulate global warming policies within rich low-temperature countries that avoids
damage from global warming. The article analyzes optimal carbon taxes on commodities within
such rich low-temperature countries when damage inflicted upon poor high-temperature countries
are accompanied with foreign aid. The article contributes to the literature by identifying two cases
where the second-best optimal carbon tax for such rich countries exceeds the marginal damage
inflicted on poor countries. First, when rich countries place a higher altruistic welfare weight on
environmental damage than on economic well-being within poor countries. Second, when foreign
aid is hampered by taxes within aid-receiving countries. The article also identifies cases where the
Pigouvian tax implements the social planner solution. Hence, altruistic preferences and foreign aid
contributes to solve the free-rider problem associated with global warming.