Incomplete International Climate Agreements: Optimal Carbon Taxes, Market Failures and Welfare Effects

This paper provides an empirical study of optimal carbon taxes and welfare effects under incomplete international climate agreements when there are market failures in the cooperating countries. The objective of the group of countries taking part in the international climate agreement is to design carbon taxes that maximize their aggregate net income, subject to a constraint on global CO₂ emissions. We use a numerical energy model to study scenarios that differ with respect to types of CO₂ taxes and countries taking part in the climate agreement. We also discuss the impact on regional net income following from different international climate agreements.