Circumspection, reciprocity, and optimal carbon prices

Assessments of the benefits of climate change mitigation—and thus of the appropriate stringency of greenhouse gas emissions abatement—depend upon ethical, legal, and political economic considerations. Global climate change mitigation is often represented as a repeated prisoners’ dilemma in which the net benefits of sustained global cooperation exceed the net benefits of uncooperative unilateral action for any given actor. Global cooperation can be motivated either by circumspection—a decision to account for the damages one’s own actions inflict upon others—or by the expectation of reciprocity from others. If the marginal global benefits of abatement are approximately constant in total abatement, the domestically optimal price approaches the global cooperative optimum linearly with increasing circumspection and reciprocity. Approximately constant marginal benefits are expected if climate damages are quadratic in temperature and if the airborne fraction of carbon emissions is constant. If, on the other hand, damages increase with temperature faster than quadratically or carbon sinks weaken significantly with increasing CO₂ concentrations, marginal benefits will decline with abatement. In this case, the approach to the global optimum is concave and less than full circumspection and/or reciprocity can lead to optimal domestic abatement close to the global optimum.