Altruism and global environmental taxes

Abstract

A global externality like the GHG emissions leading to climate change are both due to free-riding at the individual level as well as the government level. A government aiming to maximise domestic social welfare may make individuals internalise the damage within their country, but will free-ride on the damage caused to other countries. Only a global cooperative solution could internalise global damage entirely. If individuals have altruistic concern for others but continue to believe that their consumption is negligible relative to the total, they will not change their behaviour. However, this paper shows that in a multi-country setting the global equilibrium levels of consumption for both the non-cooperative and cooperative solutions are affected by altruism. The key results are (a) that non-cooperative governments maximising domestic welfare will internalise some of the damage inflicted on other countries depending on the level of altruistic concern individuals have, and (b) the cooperative global optimum also changes as altruism leads individuals to effectively experience damage in other countries as well as the direct damage to them. Since altruistic concern for others may vary across countries, global welfare then becomes a function of the relative levels of altruistic concern between countries.