Clear Skies: Multi-Pollutant Climate Policy in the Presence of Global Dimming

Multi-pollutant interactions can have crucial implications for the design and performance of environmental policy targeting single pollutants. This paper presents a two-region model where a global pollutant (CO2) and local pollutant SO2 are produced jointly. The interaction between SO2 and CO2 gives rise to the global dimming effect, which relates SO2 emissions to the environmental damage caused by CO2 emissions. We analyze climate policy by comparing abatement of these pollutants in the presence and absence of the dimming effect. We then draw implications for the design of international climate agreements, which should reflect the interactive nature between pollutants. The paper also illustrates how a market-based policy in the form of emissions taxes can be embedded into climate agreements to facilitate an efficient coordination of multi-pollutant abatement across regions. Our model predicts that this involves a uniform tax on the global pollutant but differentiated (region-specific) taxes on the local pollutant.