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Keynes Fund


Summary of Project Plan

Carbon dioxide emissions are increasing to unprecedented levels calling for the urgent need to implement policies to slow down such increase in order to avoid the consequences of climate change, such as the sea level rise and changes in precipitation patterns, with direct impacts on the economy. One such mitigation policy is to implement a carbon tax, which is a tax levied per unit of carbon dioxide emissions into the atmosphere.

The importance of addressing climate change is reflected in a growing literature which integrates the climate and the economy. Dasgupta and Heal (1974) and Nordhaus (1977) pioneered this line of research by adding a resource sector and a climate sector, respectively, into a standard Ramsey growth model. See also Nordhaus (1994) and Nordhaus and Boyer (2000). More recently, John Hassler and Per Krussel, both at the Stockholm School of Economics, are pushing the research on the economics of climate change. They embed a modern climate sector into a Ramsey growth model with different types of energy sources, such as those based on fossil fuel and more clean type of energy – solar power and others. They implement both a positive and a normative analysis, and they suggest an optimal carbon tax rate (Golosov, Hassler, Krusell, and Tsyvinski, 2014) by estimating the elasticity of climate change damage on total output and welfare (Hassler, Krusell, and Olovsson, 2017).

While some papers have explored the relation between a carbon tax and total output and welfare, there has been limited research so far exploring the distributional and allocative effects of climate change mitigation policies using heterogeneous agent modelling. A carbon tax, for instance, just like any other tax, will have redistribution and allocative effects and these effects might be very different across countries because countries are heterogeneous on their production structure and even within countries, individuals can be affected differently by a carbon tax and other policies.

This project therefore aims to contribute to the existing literature on climate and the economy and explore the distributional and allocative effects of different climate change policies in a growth model with individual heterogeneity and different economic activities. We will base our theory on a modified version of the occupational model developed first by Roy (1951) and extended to a dynamic setting by Hsieh, Hurst, Jones and Klenow (2013). See also Lagakos and Waugh (2013) and Lee and Shin (2017). With this Roy model we can map labour reallocation across sectors after a carbon tax is levied and then analyse the implications of the carbon tax on individuals’ occupational choice and by capturing changes in individuals’ wage.

The quantitative analysis will be conducted by disciplining the model with micro level data for a sample of developing and advanced economies. The data will be coming from two sources: First of all, we will use micro level data from the Integrated Public Use Microdata Series (IPUMS), developed by the Minnesota Population Center at University of Minnesota. The data portal contains censuses of over 100 countries and harmonized survey data with over 30,000 integrated variables and 150 million records. With this dataset we can determine the occupation of workers for different countries looking at disaggregated level of activities. Given data availability and richness- by depth (capturing many variables within the same country) and breadth (across many countries); we can replicate the analysis to many countries. In order to investigate how different sources of energy are used in a country in different activities, we will use data from the World Input-Output Database, which contains the Input-Output matrix for different countries. Since countries differ in their labour force composition and production structures, different countries are expected to react differently to different climate change mitigation policies. This analysis will therefore allow us to compare cross-country dynamics in terms of labour reallocation and income redistribution in response to climate change mitigation policies.



Dr. Tiago Cavalcanti and Dr. Cezar Santos


Dr Tiago Cavalcanti is University Reader in Economics at the University of Cambridge, Fellow of Trinity College, Adjunct Professor at Sao Paulo School of Economics-FGV. His research expertise is Macroeconomics, Growth, Economic Development.


Dr Cezar Santos is Research Economist at the Bank of Portugal, Associate Professor of Economics at Getulio Vargas Foundation, and Research Affiliate, CEPR. His research expertise is in Macroeconomics, Development, Labor, Family Economics.


Cambridge Working Papers in Economics (CWPE)



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