Globalized economy and national policies: Issues in comparing carbon emissions mitigation efforts under demographic and institutional asymmetry

Abstract

The success of the 2015 Paris Agreement in achieving its main temperature goal depends on its ability to increase the ambitions of individual countries to reduce their carbon emissions through effort comparison and peer pressure. Despite the empirical relevance of demographic changes in affecting factor prices, economic growth, and capital flows across countries, most comparisons of countries'carbon emissions reduction efforts are based on models that cannot capture demographic effects. Overlooking future demographic changes is problematic given the profound yet asymmetric demographic changes that countries are undergoing. This paper uses a two-country life-cycle model to show that comparing carbon emissions mitigation efforts can be misleading if countries'baseline emissions trajectories do not account for demographic dividends and spillovers from one country to another from unsynchronized demographic changes and asymmetric institutions. Through capital flows, differences in the timing, speed, and magnitude of demographic changes can reduce the emissions baseline in one country while increasing it in another country relative to the baseline with no spillovers ? an effect which is amplified by differences in institutions such as pension and social security systems. Models that do not consider the effect of demographic changes and the institutions on the economy and emissions may underestimate one country's carbon emissions reduction effort while overestimating that of another. Consequently, neglecting demographic changes when comparing countries'carbon emissions mitigation efforts can undermine the successful implementation of the Paris Agreement.