The Winners and Losers of Climate Policies: A Sufficient Statistics Approach

Abstract To combat global warming, climate policies like carbon taxes, renewable subsidies, and carbon tariffs must be implemented to phase out fossil fuel consumption and lower emissions. Who are the winners and losers of such policies? Through a simple Integrated Assessment Model with heterogeneous countries and international trade in goods and energy, we study both the costs of implementing these policies unilaterally, and the local costs and global gains of international policy cooperation. To do so, we express and decompose welfare changes under different policy regimes to the first order as a function of sufficient statistics that depend on observables and identifiable elasticities like nations’ energy mix, energy rents, trade shares, energy supply and demand elasticities, and damage parameters. We show that climate change has non-trivial reallocation effects through international trade in goods and energy. Pursuing unilateral policies generates strong leakage effects, primarily through energy trade. Global climate policy cooperation mitigates leakage, but not all countries have an incentive to participate. Regional climate clubs operate differently: an EU-wide club reduces global emissions but creates internal winners and losers, while an ASEAN climate club achieves smaller global gains but delivers welfare increases for member nations.