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Quantitative dynamic macroeconomic analysis of global climate change and inequality

Final Report Summary - MACROCLIMATE (Quantitative dynamic macroeconomic analysis of global climate change and inequality)

The overall purpose of the project had a broad goal and a narrower one. The broad goal has been to build a research center of excellence within the broad area of macroeconomics and inequality. The narrow goal is to develop a research area---studying the interactions between economics and climate science---along various directions. Overall, both these goals have been achieved. The macroeconomics group is flourishing and is having an impact on the international research scene. This impact is achieved across seniority levels: the senior members of the group have had significant success in publishing and achieving impact internationally not only narrowly defined in terms of research but also on a policy level; the group of junior researchers (assistant professors) has grown in size and is also doing extremely well in publications and international recognition; and there has been a recent boom in the inflow of graduate students to the group. One measure of the overall success of the group is in its ability to attract more researchers (both with PhDs and graduate students) from other countries; these effects here are clear and striking. The research of the graduate students is particularly important and they have begun producing working papers of truly excellent quality---arguably, some of these recent papers, produced during this last reporting period, will have publication potential in the very best general-interest economics journals. The research project on economics and climate is also flourishing, both publication-wise and impact-wise. During the last reporting period, the main one-region analysis was accepted for publication in Econometrica, one of the top-five general-interest journals in economics, an outcome which could not be improved on. The insights in that paper have also generated several policy pieces---written up separately---and had impact more broadly. As an example, we were invited to a private meeting in Beijing with China’s premier minister Li and talked to him about the research, suggesting that China adopt the carbon tax package we argue for in the paper, and the results were also presented at a high-profile conference in Beijing (the 2013 Caixin summit), on VoxEU, and so on. The multi-region model has been completed as well, and is now simulated for various policy scenarios, with extremely rich output. As another example of the success of the project, we have been approached---separately!---by the editors of the North-Holland’s Handbook series, one on Macroeconomics and one on Environmental Economics, to write chapters in the new respectively volumes they are organizing. The suggested topic in both cases is Environmental Macroeconomics, but the focus is very different in each case. In any case, it is a strong sign of success that we have been approached by BOTH these groups (one would have been wonderful enough!). The main insight of the one-region model is its development, on the basis of dynamic stochastic general-equilibrium analysis, of a formula for the optimal carbon tax. The formula is stunningly simple and yet robust to a large number of extensions. The second model is a high-resolution global model with approximately 20,000 regions in the analysis, modeled with detail and all making part of a stochastic, dynamic general-equilibrium model amenable to global welfare analysis and, hence, policy evaluation. This model allows us, for the first time, to ask questions where heterogeneity is in the foreground---both where the aim is to ask detailed questions about heterogeneous impacts of policy and climate change as well as to analyze the consequences of heterogeneous policy, i.e. where different regions have different policy stances. There is nothing remotely comparable to this model anywhere in this research area, broadly defined. The key emphasis, thus, is (i) on heterogeneity and (ii) on a fully, internally consistent integration of the carbon cycle and the climate system with a state-of-the-art economic model.