Climate policy targets in emerging and industrialised economies: the influence of technological differences, environmental preferences and propensity to save

  • Birgit Bednar-Friedl

Although emerging economies claim that industrialised countries need to reduce their carbon emissions first, stabilisation of the future global climate system requires immediate action by all countries. In a stylised two-country intertemporal general equilibrium model, we derive welfare maximising emission caps in emerging and industrialised countries, taking account of country differences in technology, environmental preferences and propensity to save. Simultaneous target setting is compared to a sequential one in which the industrialised country commits itself to binding targets first. In the latter case, when the industrialised economy has stronger environmental preferences and a lower relative pollution production share, the industrialised economy can increase its joint economic and environmental welfare by setting a laxer target. On the other hand, when the emerging economy has considerably higher environmental preferences, our results suggest that the industrialised economy will choose a more restrictive target in a sequential setting than in a simultaneous one, contrary to first thought that a first mover is always pursuing a "symbolic" policy with a lax target.