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The Carbon Abatement Game -- by Christoph Hambel, Holger Kraft, Eduardo S. Schwartz

Climate change is considered as one of the major global challenges. Although countries past and future contributions to the accumulation of greenhouse gases in the atmosphere are different, all countries are affected, but not necessarily in the same way (e.g. rising sea levels). This is the reason why it is so hard to reach global agreements on this matter. We study this issue in a dynamic game-theoretical model (stochastic differential game) with multiple countries that are open economies, i.e. we allow for international trade between the countries. Our framework involves stochastic dynamics for CO2-emissions and economic output of the countries. Each country is represented by a recursive-preference functional. Despite its complexity, the model is tractable and we can quantify each country's decision on consumption, investment, carbon abatement and the social cost of carbon, explicitly. One key finding is that both the country-specific and global social cost of carbon are increasing in the trade volume. This result is robust to adding capital transfers between countries. Our numerical examples suggest that disregarding trade might lead to a significant underestimation of the SCC.