Abstract: A unilateral carbon tax trades off the distortionary costs of taxation and the future gains from slowing down global warming. Because the cost is local and immediate, whereas the benefit is global and delayed, this tradeoff tends to be unfavorable to unilateral carbon taxes. We show that this logic breaks down in a world with trade and migration where economic geography is shaped by agglomeration economies and congestion forces. Using a multisector dynamic spatial integrated assessment model (S-IAM), this paper predicts that a carbon tax introduced by the European Union (EU) and rebated locally can, if not too large, increase the size of Europe’s economy by concentrating economic activity in its high-productivity non-agricultural core and by incentivizing immigration to the EU. The resulting change in the spatial distribution of economic activity improves global efficiency and welfare. A unilateral carbon tax with local rebating introduced by the US generates similar global welfare gains. Other forms of rebating can dilute or revert this positive effect.

Replication Files

Abstract: We study local carbon policy to address the consequences of climate change. Standard analysis suggests that the social cost of carbon determines optimal carbon policy. We start by using the spatial integrated assessment model in Cruz and Rossi-Hansberg (2021) to measure the local social monetary cost of CO₂ emissions: the Local Social Cost of Carbon (LSCC). Although the largest welfare costs from global warming are concentrated in the warmest parts of the developing world, adjusting for the local marginal utility of income implies that the LSCC peaks in warm and high-income regions like the southern parts of the U.S. and Europe, as well as Australia. We then proceed to study the effect of the actual carbon reduction pledges in the Paris Agreement and the progress they can make in implementing the expressed goal of keeping global temperature increases below 2°C. We find that although the distribution of pledges is roughly in line with the LSCC, their magnitude is largely insufficient to achieve its goals. The required carbon taxes necessary to keep temperatures below 2°C over the current century are an order of magnitude higher and involve large implicit inter-temporal transfers. Increasing the elasticity of substitution across energy sources is important to reduce the carbon taxes necessary to achieve warming goals.

Replication Files

Abstract: Global warming is a worldwide and protracted phenomenon with heterogeneous local economic effects. We propose a dynamic economic assessment model of the world economy with high spatial resolution to assess its consequences. Our model features several forms of adaptation to local temperature changes, including costly trade and migration, local technological innovations, and local natality rates. We quantify the model at a 1° × 1° resolution and estimate damage functions that determine the impact of temperature changes on a region’s fundamental productivity and amenities conditional on local temperatures. Welfare losses from global warming are very heterogeneous across locations, with 20% losses in parts of Africa and Latin America but also gains in some northern latitudes. Overall, spatial inequality increases. Uncertainty about average welfare effects is significant, but much smaller for relative losses across space. Migration and innovation are shown to be important adaptation mechanisms. We use the model to study the impact of carbon taxes, abatement technologies, and clean energy subsidies. Carbon taxes delay consumption of fossil fuels and help flatten the temperature curve but are much more effective when an abatement technology is forthcoming.

Replication Files

Supplementary Materials

Abstract: This paper quantitatively assesses the world's changing economic geography and sectoral specialization due to global warming. It proposes a two-sector dynamic spatial growth model that incorporates the relation between economic activity, carbon emissions, and temperature. The model is taken to the data at the 1° by 1° resolution for the entire world. Over a 200-year horizon, rising temperatures consistent with emissions under Representative Concentration Pathway 8.5 push people and economic activity northwards to Siberia, Canada, and Scandinavia. Compared to a world without climate change, clusters of agricultural specialization shift from Central Africa, Brazil, and India's Ganges Valley, to Central Asia, parts of China and northern Canada. Equatorial latitudes that lose agriculture specialize more in non-agriculture but, due to their persistently low productivity, lose population. By the year 2200, predicted losses in real GDP and utility are 6% and 15%, respectively. Higher trade costs make adaptation through changes in sectoral specialization more costly, leading to less geographic concentration in agriculture and larger climate-induced migration.

Replication Files

Abstract: We develop a dynamic spatial growth theory with realistic geography. We characterize the model and its balanced-growth path and propose a methodology to analyze equilibria with different levels of migration frictions. Different migration scenarios change local market size, innovation incentives, and the evolution of technology. We bring the model to the data for the whole world economy at a 1° × 1° geographic resolution. We then use the model to quantify the gains from relaxing migration restrictions. Our results indicate that fully liberalizing migration would increase welfare about threefold and would significantly affect the evolution of particular regions of the world.

Videos of Simulations

Replication Files

Abstract: This paper studies the impact of spatial frictions on Asia’s long-term spatial development. Using the framework provided in Desmet, Nagy, and Rossi-Hansberg (2016), we analyze the evolution of Asia’s economy and the relative performance of specific regions and countries. We then perform a number of counterfactual experiments and find that a worldwide drop in transport costs of 40% increases the present discounted value of real income by 70.7% globally and 78% in Asia. These figures are much larger than those found in standard quantitative trade models because they include dynamic effects and take into account intracountry transport costs. We also perform exercises in which we upgrade Asia’s road network or relax migratory restrictions between locations in Asia. These exercises emphasize the important role of spatial frictions in the development of Asia’s economy.

Abstract: This paper studies the recent spatial development of India. Services, and to a lesser extent manufacturing, are increasingly concentrating in high-density clusters. This stands in contrast with the United States, where in the last decades services have tended to grow fastest in mediumdensity locations, such as Silicon Valley. India’s experience is not common to all fast-growing developing economies. The spatial growth pattern of China looks more similar to that in the United States than to that of India. Our findings suggest that certain frictions are keeping medium-density places in India from growing faster.

Abstract: We present a theory of spatial development. Manufacturing and services firms located in a continuous geographic area choose each period how much to innovate. firms trade subject to transport costs and technology diffuses spatially. We apply the model to study the evolution of the US economy in the last half-century and find that it can generate the reduction in the manufacturing employment share, the increased spatial concentration of services, the growth in service productivity starting in the mid-1990s, the rise in the dispersion of land rents in the same period, as well as several other spatial and temporal patterns.

Online Appendix

Replication Files

Abstract: We propose a framework to study the impact of information and communication technology on growth through its impact on organization and innovation. Agents accumulate knowledge to use available technologies and invent new ones. The use of a technology requires the development of organizations to coordinate the work of experts, which takes time. We find that while advances in information technology always increase growth, improvements in communication technology may lead to lower growth and even to stagnation, since the payoff to exploiting available technologies through organizations increases relative to the payoff from developing new innovations.

Abstract: Between 1970 and 2000 employment growth across U.S. counties exhibited very different patterns in manufacturing and services. Whereas manufacturing employment growth was negatively related to initial manufacturing employment across the entire distribution of counties, service employment growth was positively related to initial service employment for intermediate sized counties. This paper presents a theory to rationalize these facts. Local sectoral growth is driven by technological diffusion across space and depends on the age of the sector. The theory correctly predicts the relation between county employment growth and initial county employment in manufacturing at the turn of the 20th century.

Abstract: Most economic activity occurs in cities. This creates a tension between local increasing returns, implied by the existence of cities, and aggregate constant returns, implied by balanced growth. To address this tension, we develop a general equilibrium theory of economic growth in an urban environment. In our theory, variation in the urban structure through the growth, birth, and death of cities is the margin that eliminates local increasing returns to yield constant returns to scale in the aggregate. We show that, consistent with the data, the theory produces a city size distribution that is well approximated by Zipf’s law, but that also displays the observed systematic underrepresentation of both very small and very large cities. Using our model, we show that the dispersion of city sizes is consistent with the dispersion of productivity shocks found in the data.

Robustness Appendix