The Discussion Papers series presents results from ongoing research projects and other research and analysis by SSB staff, intended for international journals or books. The views and conclusions in this document are those of the author(s).
The article analyzes optimal carbon taxes on commodities within such rich low-temperature countries when damage inflicted upon poor high-temperature countries are accompanied with foreign aid. The article contributes to the literature by identifying two cases where the second-best optimal carbon tax for such rich countries exceeds the marginal damage inflicted on poor countries. First, when rich countries place a higher altruistic welfare weight on environmental damage than on economic well-being within poor countries. Second, when foreign aid is hampered by taxes within aid-receiving countries. The article also identifies cases where the Pigouvian tax implements the social planner solution. Hence, altruistic preferences and foreign aid contributes to solve the free-rider problem associated with global warming.