Optimal climate policies under fairness preferences

Integrated assessment models are tools largely used to investigate the benefit of reducing polluting emissions and limiting the anthropogenic mean temperature rise. However, they have been often criticized for their underlying assumptions, often leading to low levels of abatement. Countries and regions that are generally the actors in these models are usually depicted as having standard concave utility functions in consumption. This, however, disregards a potentially important aspect of environmental negotiations, namely its distributive implications. The present paper tries to fill this gap assuming that countries/regions have Fehr and Schmidt (The Quarterly Journal of Economics 114(3):817-868, 1999) (F&S) utility functions, specifically tailored for including inequality aversion. By adopting the RICE model, we compare its standard results with the ones obtained introducing F&S utility functions, showing that, under optimal cooperation, the level of temperature rise is lower in the last scenario. In particular, the peak temperature, reached in 2155 under standard assumptions and one or two decades later under F&S preferences with, respectively, heterogeneous and homogeneous F&S inequality aversion parameters (alpha and beta), is of 2.86 degrees C in the former scenario and of 2.65 degrees C and 2.67 degrees C in the latter two. Furthermore, it is shown that potentially stable coalitions are easier to be achieved when F&S preferences are assumed. However, potentially stable coalitions are far from reaching environmental targets close to limiting the mean temperature rise below 2 degrees C despite the adoption of F&S utility functions. The 2 degrees C target is almost achieved in all scenarios when the payoffs in the F&S utility function are given by the per-capita consumption rather than utility of consumption, with F&S preferences and heterogeneous F&S inequality aversion parameters leading to a peak temperature rise of 2.04 degrees C.