GCOE Discussion Paper Series
Global COE Program

Human Behavior and Socioeconomic Dynamics
Discussion Paper No.151

Climate change, economic growth, and health

Masako Ikefuji, Jan R. Magnus, and Hiroaki Sakamoto

September 2010

GCOE Secretariat
Graduate School of Economics

OSAKA UNIVERSITY

1-7 Machikaneyama, Toyonaka, Osaka, 560-0043, JapanClimate change, economic growth, and health∗August 10, 2010

Masako IkefujiInstitute of Social and Economic Research, Osaka University
Jan R. Magnus
Department of Econometrics & Operations Research,
Tilburg University
Hiroaki Sakamoto
Department of Economics, Kyoto University

We are grateful to seminar participants at the Monte Verità Conference on Sustainable Resource Use and Economic Dynamics (SURED), Ascona, Switzerland, 7–
10 June, 2010, and the Fourth World Congress of Environmental and Resource
Economists (WCERE), Montréal, Canada, 28 June – 2 July, 2010 for helpful comments. Our research has been financially supported by the Nomura Foundation
and JSPS Grant-in-Aid for Scientific Research Nos. 22530177 (Ikefuji) and 18078001(Sakamoto). E-mail addresses: ikefuji@iser.osaka-u.ac.jp (Ikefuji), magnus@uvt.nl (Magnus), hsakamoto@eco.mbox.media.kyoto-u.ac.jp (Sakamoto).
∗1

Proposed running head:
Climate change, economic growth, and healthCorresponding author:
Masako IkefujiInstitute of Social and Economic Research
Osaka University
6-1, Mihogaoka, Ibaraki, Osaka 567-0047
Japan
E-mail: ikefuji@iser.osaka-u.ac.jp
Abstract: This paper studies the interplay between climate, health, andthe economy in a stylized world with four heterogeneous regions, labeled‘West’ (cold and rich), ‘China’ (cold and poor), ‘India’ (warm and poor),and ‘Africa’ (warm and very poor). We introduce health impacts into a
simple integrated assessment model where both the local cooling effect ofaerosols as well as the global warming effect of CO2 are endogenous, and investigate how those factors affect the equilibrium path. We show how someof the important aspects of the equilibrium, including emission abatement
rates, health costs, and economic growth, depend on the economic and geographical characteristics of each region.
JEL Classification: D91, I18, Q54, Q58
Keywords: Climate change, health, economic growth, local dimming, cobenefits.

2

1

Introduction

The worldwide increase of CO2 emissions has caused an increase in the concentration of CO2 (and other greenhouse gases) in the atmosphere, and thishas led to higher temperatures on Earth through the greenhouse effect: global
warming. The greenhouse effect is, however, not the only pollution effect.
Producers and consumers create dirt and this dirt enters the atmosphere as
aerosols. The aerosol particles reflect sunlight so that less sunlight falls onto
the Earth and the Earth becomes cooler: local dimming. There are thus
two opposite effects. Moreover, the greenhouse effect is global whereas theaerosol effect is (primarily) local. If one region produces more CO2 thenwe all suffer, but if one region produces more aerosols, only that region isaffected. The statistical evidence for the two pollution effects was recently
investigated by Magnus et al. (2010).
Since aerosols have a cooling effect, one might think that producing moreaerosols is a useful tool to counter global warming. But aerosols also havea negative effect: they cause more people to suffer from lung and otherrespiratory diseases. The literature on the effects of air pollution on healthhas been evaluated by the WHO (2000, 2006), and there is little doubt thata significant link exists between short-term exposure to sulphur dioxide andasthma (Bates et al., 1990; Galán et al., 2003; O’Connor et al., 2008). Moreaerosol emissions thus cause more people to be ill, and all such aerosolinduced diseases are labeled ‘asthma’ in this paper.
While air pollution causes more asthma, an increase in temperature will
also lead to more diseases, such as malaria. A higher temperature affects thenumber of people at risk for malaria, and hence also the number of malaria
patients (Martens et al., 1997; Githeko et al., 2000; van Lieshout et al., 2004;
Pascual et al., 2006). All temperature-induced diseases are labeled ‘malaria’.
We thus distinguish between two types of pollution (CO2 and aerosols)with different effects on climate, and between two associated diseases. In
addition, climate change has an impact on the natural and human environment (IPCC, 2007), and this causes economic costs through three channels.
First, climate change affects productivity directly. For example, flooding andstorms cause drinking water to be scarce, and therefore reduce crop productivity, thus harming the population and damaging the economy. Second,climate change increases the number of sick people (malaria), reduces thelabor force, and hence the amount of output. Third, more diseases will increase health care and prevention costs, so that less money is available for3

consumption and investment.
In this paper we propose a simple climate-economy model, based on the
Nordhaus and Yang (1996) RICE model, in which the interrelations between
pollution, climate, health, and the economy can be studied. Our model isan integrated assessment model with multiple regions. Our main analysis
takes place in a highly stylized world with four regions: ‘West’ (cold andrich), ‘China’ (cold and poor), ‘India’ (warm and poor), and ‘Africa’ (warmand very poor). The region labeled ‘West’ represents North America, European Union, and Japan; the region labeled ‘India’ represents not only India,
but also Pakistan, Indonesia, and Latin America; ‘China’ represents mainly
China; and ‘Africa’ only Africa. Each region maximizes its own welfare (andthus chooses its policy instruments optimally), taking into account its own
specific geographical and economic characteristics and its own regional damages from CO2 and aerosols. The four regions are connected to each other
only through the accumulation of CO2 in the global atmosphere. Hence,
more CO2 emission from one region may cause damages in other regions. In
this stylized world we examine how climate change affects health and production in each of the regions. Industrial regions tend to be crowded andhence vulnerable to health risks of exposure to aerosols. Warm regions arevulnerable to temperature-related diseases. We investigate how equilibrium
levels of abatement of both emission types are related to the geographical andeconomic characteristics of each region, we examine how much health costs
associated with CO2 and aerosols each region has to carry, and we discuss
how global CO2 accumulation contributed by a specific region affects otherregions.
Recently, the links between air pollutants and greenhouse gases and theimpact on human health through these links have received much attention(Swart et al., 2004; EEA, 2004). Such studies typically consider a global
cooling effect of aerosols to partially offset global warming, and hence they
do not contain the local dimming effects which we study and which lead todifferences in economic behavior. Some studies also emphasize the ancillary
benefits of reduced air pollution (Burtraw et al., 2003; Aunan et al., 2007;
Bahn and Leach, 2008; Bollen et al., 2009). Strategies to reduce greenhousegas emissions would thus decrease air pollutants as well. The magnitudeof this co-benefit influences abatement strategies in each region, and thus
affects global climate as well. We investigate the effect of these co-benefits
on an equilibrium regional level of abatement of CO2 and aerosols. Pittel
and Rübbelke (2008) suggest that ancillary benefits of climate policy may
provide incentives for developing countries to participate in an international
agreement on climate change. However, if we take account of local dimming
through air pollutants, then the co-benefit of climate policy for developing4

countries (with typically high temperatures and hence many temperaturerelated diseases) will be reduced. Bahn and Leach (2008) examine the welfare
and growth effects of climate change mitigation policies, incorporating thecooling effect and health effects of sulphur dioxide emissions in an overlapping
generations model. They examine the inter-generational effects of policies,
but not the intra-temporal effects. In contrast, we consider multiple regions
and local health effects of climate change in a Nash game framework, thus
illustrating regional disparities in climate, economics, and health. Moreover,
we analyze how the inter-temporal resource allocation differs among regions
responding to varying rates of social time preference.

global warming
CO2

CO2

local dimming
aerosols

local dimming
aerosols

asthma malaria

malaria asthma
economic activity

economic activity
region A

region B

Figure 1: Interactions between the economy, temperature, and healthSome aspects of our model are summarized in Figure 1. Region A has
large CO2 emissions relative to region B, but about the same amount ofaerosol emissions. The aerosols cause asthma and also reduce the greenhouseeffect. The resulting global warming affects both regions in the same way(since CO2 concentration is global) and causes malaria. The diseases cause
less people to work and hence reduce economic activity.
The paper is organized as follows. In Section 2 we present the economyclimate model of our stylized world. In Section 3 we examine the firstorder conditions of the welfare-maximizing problem under local economic
and climate restrictions. Section 4 presents the results based on the warm5

cold rich-poor divide in our stylized world. The robustness of our results isstudied in Section 5. Section 6 concludes.

2

The model

Our stylized world consists of J regions which we consider over T periods.
One period is ten years. At the beginning of period t there are Nj,t inhabitants of region j, identical apart from the fact that some work while others
don’t, some are healthy while others are ill, and some are ‘at risk’ whileothers are not. The healthy workers constitute the labor force Lj,t . People
living in different regions may be different.
Supply side: The labor force together with the available capital stock generate GDP Yj,t through a Cobb-Douglas production function
Yj,t =

ψj,t
1−
K jL j1 + dj,t j,t j,t(0 < j < 1),(1)

where Kj,t denotes the capital stock in region j at the beginning of period t,
dj,t represents temperature-induced damage, and ψj,t is technological efficiency. All stocks are measured at the beginning of the period. Temperature
Zj,t enters our model through three channels. The first channel is that if temperature deviates from the ‘optimal’ temperature Zj,t = Zj∗ (the temperaturein 1900), then damage occurs resulting in a reduction of output. Following
Nordhaus (2008) we specify damage dj,t as
dj,t = γj (Zj,t − Zj∗ )2(γj > 0).

(2)

(0 < δjk < 1),(3)

Capital is accumulated throughKj,t+1 = (1 − δjk )Kj,t + Ij,twhere Ij,t denotes investment and δjk is the depreciation rate of capital (assumed constant over time). Different regions may have different depreciation
rates. The labor force Lj,t is defined as a proportion ωj (constant over time)of the healthy people in the region:
Lj,t = ωj (Nj,t − Dj,t ),where Dj,t denotes the number of people with some disease. There are two
diseases — one caused by temperature (say malaria), the other by aerosols(say asthma). The two diseases are not mutually exclusive, but they are6independent. Denoting the fraction of the population suffering from the two(1)(2)
diseases by sj,t and sj,t , respectively, we have
(1)

(2)

(1) (2)

Dj,t = (sj,t + sj,t − sj,t sj,t )Nj,t ,and hence(1)(2)

Lj,t = ωj (1 − sj,t )(1 − sj,t )Nj,t(0 < ωj < 1).

(4)

Demand side: In each region j and period t, the income generated by GDP
can be spent in four ways:
Yj,t = Cj,t + Ij,t + Aj,t + Hj,t,(5)

namely consumption C, investment I, abatement cost A, and health cost
H. Consumption yields instantaneous welfare through (16), investment increases the capital stock and future production through equations (1) and (3),abatement of pollution reduces emissions through equation (10), and healthcost (12) covers the prevention and treatment of diseases.
Pollution: Each region pollutes by emitting CO2 (c) and aerosols (a). CO2
has a global (instantaneous) effect, while aerosols have a local effect. More
CO2 leads to global warming, more aerosols lead to local dimming. Emissionsca
Ej,t(for CO2) and Ej,t(for aerosols) are defined bycEj,t= ecj,t Yj,t,

with

a
Ej,t
= eaj,t Yj,t c   ccca
1 − µcj,t
σj,t σj,t
ej,t
,
=
ac
aa
1 − µaj,t
σj,t
σj,t
eaj,t

(6)

(7)

where µcj,t and µaj,t denote the abatement fractions for CO2 and aerosols,
respectively, and the σj,t are technical parameters.
caac. The idea thatand σj,t
We note the inclusion of two cross-influences σj,ta policy to reduce one type of pollutant has an effect on another type ofpollutant was well summarized by Swart et al. (2004) who state that manyof the traditional air pollutants and greenhouse gases have common sources;that they interact chemically and physically in the atmosphere; and that theycause a variety of intertwined environmental effects at the local, regional, andglobal scale. Empirical evidence that a policy to reduce CO2 (through µc )affects aerosol emissions (and hence that σ ac > 0) was provided by Cifuentes
et al. (2001) in a study of four large cities (Mexico City, New York City,
Santiago, and São Paulo); and by Bell et al. (2007). The opposite effect7

(that is, the question whether σ ca > 0) is ambiguous: a policy on reducing
aerosols (through µa ) may or may not affect CO2 emissions.
Aerosols are generated in the process of fossil fuel combustion. Hence,
activities that would reduce carbon emissions could also reduce aerosol emissions, thus improving the local air quality as a secondary benefit. These cobenefits are typically not incorporated in climate policy analyses and they
deserve more attention (Nemet et al., 2010). The co-benefit is likely to be
especially large in developing countries, and this feature is captured by asacsuming that the technical parameter σj,tis positive for all regions and larger
in poor regions. More precisely, we shall assume a stable relationship betweencaaccarbon emissions and aerosol emissions, and specify σj,tand σj,t
as
ca
aa
σj,t
= χca
j σj,t ,

ac
cc
σj,t
= χac
j σj,t ,ac
caac
for some constants χcaj and χj . Notice that if χj and χj are small, then
c
ac
cc
c
ca a
Ej,t
= (1 − χcaj χj )σj,t (1 − µj,t )Yj,t + χj Ej,tcca
≈ σj,t(1 − µcj,t)Yj,t + χca
j Ej,t ,and, similarly,
a
aa
c
Ej,t
≈ σj,t(1 − µaj,t )Yj,t + χac
j Ej,t .

The first term in each equation represents the amount of emission whichcomes directly from production, while the second term captures the possibility that carbon and aerosol emissions can be a byproduct of each other.
So the parameter χcaj may be interpreted as a fraction of aerosol-emitting
sources which also emit carbon dioxide as a byproduct. Similarly, χacj is afraction of carbon-emitting sources which also emit aerosol.
Global CO2 concentration is given by
Mt =

J
X

Mj,t ,

(8)

j=1

where
c
Mj,t+1 = (1 − δ c )Mj,t + ζ c Ej,t

(0 < δ c < 1).

(9)Here, δ c denotes the depreciation rate of CO2 (rate of removal from atmosphere), and ζ c the degree of contribution of CO2 emissions to accumulation.
Some care is required in interpreting equation (9). The quantity Mj,t keeps
track of the accumulated amount of CO2 emitted by region j. Since CO2
spreads rapidly around the globe, it can not be interpreted as a concentrationin region j. It is added here to keep account of the total pollution damage
8

caused by region j.
Abatement: Extending the often-used abatement cost function from one typeof emission (as for CO2 in Nordhaus, 2008) to two types of emission (CO2and aerosols), we write
Aj,t = aj,t Yj,t,
(10)
where

c

a

aj,t = αjc (µcj,t)ξj + αja (µaj,t)ξj(11)

and the exponents ξjc and ξja are chosen greater than one, so that abatement
is convex in µcj,t and µaj,t.
Health: We are interested in the health impact of climate change and air
pollution. People will get ill from time to time and we shall consider healthcosts explicitly. All health costs are distributed evenly over the populationand everybody has the same consumption net of average health costs. Healthexpenditures consist of the costs of prevention and treatment. It will be useful to introduce the concept of population at risk. As shown by van Lieshout
et al. (2004), the population at risk of malaria increases as temperature in(1)(2)
creases. Let rj,t and rj,t denote the proportion of the population that is at
risk for disease 1 (malaria) and 2 (asthma), respectively. This is the groupthat receives preventive health care. Since prevention will not be completely
successful, illnesses occur. A sick person receives medication, will be ill for
one period, and will then be healthy again (but may of course fall ill again).
Health expenditures are given by


(1)
(2)
Hj,t = hj,t + hj,t Nj,t ,
(12)
where

(1)

(1) (1)(1) (1)(2)

hj,t = pj,t rj,t + qj,t sj,t ,(1)(2) (2)(2) (2)

hj,t = pj,t rj,t + qj,t sj,t ,

(2)

(1)

(2)

pj,t and pj,t denote the prevention costs for someone at risk, and qj,t and qj,t
are the treatment costs per patient. We specify the proportion of malaria
and asthma patients in the population as
(1)

(1)

(1)

(2)

sj,t = (1 − uj )rj,t ,
(1)

(2)

(2)

sj,t = (1 − uj )rj,t ,(2)where 0 < uj < 1 and 0 < uj < 1 denote the success rates of prevention.
Then,
(1)
(1) (1)(2)(2) (2)
hj,t = θj,t rj,t ,hj,t = θj,t rj,t ,
(13)
where
(1)

(1)

(1)

(1)

(2)

(2)

(2)

(2)

θj,t = pj,t + (1 − uj )qj,t .

θj,t = pj,t + (1 − uj )qj,t ,9

We next specify the two fractions of people at risk by


η(1)
η(2)
(1)
(2)
(1) j
(2) j
a
βj Zj,t/κj
βj νj,t Ej,t /κj(1)(2)
rj,t =
,
r
=
j,t

η(1)

η(2)
(1) j
(2) j
a
1 + Zj,t /κj
1 + νj,t Ej,t
/κj

(14)

for the two diseases malaria and asthma, respectively. The parameter νj,t in(2)
rj,t is a concentration parameter, measuring how concentrated the population
is in region j and time t. Since aerosols are (mostly) a local phenomenon,
it makes a difference whether the population is spread out over the whole
region or is concentrated in a few urban areas.
We see that temperature enters our model not only through the production function, but also through the health cost function and the available
labor force (both via s(1) ). Notice that ∂r (1) /∂Z ≥ 0 and ∂r (2) /∂E a > 0.
The second impact (more aerosols, more asthma) is reasonable, but the first(higher temperature, more malaria) requires some explanation. In Africa one
expects a rise in temperature to cause more diseases, but in Siberia a rise intemperature would result in a milder climate and possibly less diseases. We
shall assume here that a rise in temperature has no effect on malaria until itreaches a benchmark; a further increase then results in more malaria.
Climate: The temperature equation is inspired by Nordhaus (2008):
Zj,t+1 = τ0,j + τ1,j Zj,t + τ2 log(Mt )aa+ τ3,j Ej,t
+ τ4,j log(1 + τ5,j Ej,t)

(15)

In the Nordhaus model, however, the radiative forcing of aerosols is given
exogenously. It is made endogenous here based on Harvey et al. (1997). For
further details see Appendix A.2.
Temperature is thus dynamically determined by its own past, but also
by the concentration of carbon dioxide and the emission of aerosols. More
CO2 leads to a higher temperature (global warming) through the greenhouseeffect. In addition, aerosols reflect and absorb sunlight in the atmosphere,
so that less sunlight reaches the Earth (local dimming). The (global) greenhouse effect and the (local) dimming effect thus work in opposite directions.
Welfare: Each region maximizes its own welfare Wj , defined by total discounted utility:
TX
Nj,t log(Cj,t/Nj,t)
Wj =
,
(16)
t
(1
+
ρ
)
j
t=0
where ρj is the discount rate for region j.
10

3

Welfare maximization

We wish to maximize welfare (16) under the economy and climate restrictions (1)–(15). We first condense the restrictions to one resource constraint,Ψkj,t = Yj,t − Cj,t + (1 − δjk )Kj,t − Kj,t+1
(1)

(2)

− aj,t Yj,t − (hj,t + hj,t )Nj,t = 0,
together with two dynamic constraints:c ccΨmj,t = ζ Ej,t + (1 − δ )Mj,t − Mj,t+1 = 0,and
Ψτj,t = τ0,j + τ1,j Zj,t + τ2 log Mj,t +

X

Mi,t

i6=j

a
+ τ3,j Ej,t
+ τ4,j log

a
1 + τ5,j Ej,t!

− Zj,t+1 = 0.

Each region maximizes its own welfare
PJ under local restrictions. The regions
are linked only through (8): Mt = j=1 Mj,t . We are seeking the Nash equilibrium in this finite perfect-information game, and this is what our GAMS
program does.
We write the Lagrangian for region j as
Lj =

T
X
Nj,t log(Cj,t/Nj,t)t=0(1 + ρj )t

+

T
X
t=0


m
τ
τ
λkj,t Ψkj,t + λmΨ+λ
Ψj,t j,tj,t j,t ,where the λj,t (t = 0, . . . , T ) denote Lagrangian multipliers. We need todifferentiate with respect to:
Cj,t, µcj,t, µaj,t(t = 0, . . . , T )and
Kj,t , Mj,t , Zj,t(t = 1, . . . , T + 1),

based on starting values Kj,0 , Mj,0, and Zj,0.
In order to find the first-order conditions, we first write the model in
differential form. This gives(dYj,t ) =
and

∂Yj,t
∂Yj,t ∂dj,t∂Yj,t(dKj,t ) +(dLj,t) +(dZj,t)∂Kj,t∂Lj,t∂dj,t ∂Zj,t
(1)

(2)

∂Lj,t ∂rj,t∂Lj,t ∂rj,ta(dLj,t ) = (1)(dEj,t)(dZj,t) + (2)
a
∂Z
∂E
j,t
∂rj,t
∂rj,t
j,t
11

for output and labor, and(dKj,t+1 ) = (1 − aj,t )(dYj,t) − (dCj,t) + (1 − δjk )(dKj,t )
∂aj,t
∂aj,t
− c Yj,t(dµcj,t) − a Yj,t (dµaj,t)
∂µj,t
∂µj,t
(1)
(2)
(1) ∂rj,t(2) ∂rj,ta− θj,tNj,t(dZj,t) − θj,t
Nj,t (dEj,t
),
a
∂Zj,t
∂Ej,t
c
(dMj,t+1 ) = (1 − δ c )(dMj,t) + ζ c(dEj,t),and(dZj,t+1) = τ1,j (dZj,t) +∂Zj,t+1∂Zj,t+1a(dEj,t)(dMj,t ) +
a
∂Mt
∂Ej,t

for the three dynamic equations, wherecccca(dEj,t) = −σj,t
Yj,t(dµcj,t) − σj,t
Yj,t (dµaj,t) + ecj,t(dYj,t )

and
a
ac
aa
(dEj,t) = −σj,t
Yj,t(dµcj,t) − σj,t
Yj,t(dµaj,t) + eaj,t(dYj,t ).

Important is the relationship between output Y and labor L. More labor
leads to more output through the production function. More output leads
to more air pollution, more asthma, and less labor. Hence, output and labor
are determined simultaneously. We have
 c 
dµj,t






yl
yk
yτ

1 −φj,tdYj,t00 φj,t −φj,t  dµaj,t 

=
ly
la
dKj,t dLj,tφlc
0 −φlτ
φj,t
1
j,t φj,tj,tdZj,tand hence(dYj,t ) =1ly
1 + φylj,t φj,t

where
φyl
j,t =

yl la
yk
lc
φyl
j,t φj,t φj,t φj,t φj,t

∂Yj,t
,
∂Lj,t

φyk
j,t =

∂Yj,t
,
∂Kj,t

12


dµcj,t  dµaj,t 
yl lτ


−(φyτ
+
φ
φ
)
j,t
j,t j,tdKj,t ,
dZj,t
(17)

φyτ
j,t = −

∂Yj,t ∂dj,t,∂dj,t ∂Zj,t

and
(2)
(2)
∂Lj,t ∂rj,t a∂Lj,t ∂rj,t aclylc
φj,t = − (2)e , φj,t = − (2)σj,t Yj,t,a j,ta∂rj,t ∂Ej,t∂rj,t ∂Ej,t(2)(1)∂Lj,t ∂rj,t∂Lj,t ∂rj,t aalτlaσj,t Yj,t, φj,t = − (1)φj,t = − (2).
a∂rj,t ∂Ej,t∂rj,t ∂Zj,tlyc
Since φylj,t φj,t > 0, any output change caused by a marginal change in µj,t ,aµj,t , Kj,t, or Zj,t is scaled down through the interaction between output andlabor.
The first-order conditions can now be written as (for t = 0, . . . , T ):λkj,t =
and1
(1 + ρj )t (Cj,t/Nj,t) ck 
 m
 cm
cτ
πj,t
λj,t
πj,t πj,tk= −λj,t
ak
τ
am
aτ
πj,t
λj,t
πj,t πj,ttogether with a system of three dynamic equations (for t = 1, . . . , T ):
 k   kk
 k 
kmkτ
λj,t−1λj,tπj,t πj,t
πj,tmmmτ   m 
λmλj,t ,
0
π
π
=
j,t−1
j,t
j,t
τ
τk
τm
ττ
λj,t−1πj,t πj,t πj,t
λτj,t

(18)

(19)

(20)

and the terminal conditions

τlim λkj,t Kj,t = lim λm
j,t Mj,t = lim λj,t Zj,t = 0,

t→∞

t→∞

t→∞

requiring that the shadow values of more capital, more CO2 concentration,and higher temperature vanish asymptotically. Together with the three conτ
straints Ψkj,t = Ψmj,t = Ψj,t = 0 this gives us nine equations with nine unτ
knowns, namely Cj,t, µcj,t , µaj,t, Kj,t+1 , Mj,t+1 , Zj,t+1, λkj,t , λm
j,t , and λj,t , fort = 0, . . . , T . To find the values of the π coefficients is somewhat tedious,and is relegated to Appendix B.
Condition (18) says that for every region j and in every period t the
shadow value of the resource constraint equals the present value of marginalutility (both are equal to the shadow value of capital). Condition (19) equatesmarginal benefit to marginal cost of CO2 and aerosol reduction in region j.
The marginal benefit of carbon abatement thus consists not only of the reduced carbon concentration, but also of the air quality co-benefits. The
improvement of air quality causes temperature to increase, and this partly
13

offsets the effectiveness of carbon abatement. Hence, the marginal cost ofcarbon abatement includes the cost of temperature increase as a result of
air quality improvement as well as the direct abatement cost. Similarly, themarginal cost of aerosol abatement includes not only the abatement cost, butalso the indirect cost of temperature increase due to local dimming.
The three dynamic equations (20) provide the evolutions of the shadow
prices of capital stock, CO2 concentration, and temperature, respectively.
The evolution of the shadow price of capital (λkj,t−1 ) is composed of threekk kterms: the net marginal return on capital stock accumulation (πj,tλj,t ), which
includes capital depreciation, aggregate health cost of asthma due to additional output and hence additional aerosols, and net marginal return on output after abatement expenditures; the marginal return on CO2 accumulation
km m
kτ τ
(πj,t
λj,t ); and the marginal return on a change in temperature (πj,tλj,t ). An
additional unit of capital gives more output in the subsequent periods, butalso more aerosol emission and thus higher health costs. This decreases the
shadow value of capital. At the same time, the lower cost of carbon emission
km mkτ(−πj,tλj,t > 0) due to less labor, and the local dimming effect (πj,t< 0)increase the shadow value of capital.
Substituting (18) and (19) into (20) yields the Keynes-Ramsey rule:  ck  cmcτ −1 πj,t(1 + ρj )(Cj,t /Nj,t)
πj,t
πj,t
kk
km
kτ
= πj,t − πj,t , πj,t
ak ,
am
aτ
πj,t
πj,t πj,tCj,t−1 /Nj,t−1

requiring that the marginal rate of substitution between consumption today
and consumption tomorrow is equal to the physical marginal rate of substitution. We note that the Keynes-Ramsey rule for the Nash equilibrium onlyinternalizes climate change damage occurring domestically, because negative
climate change externalities to neighboring regions are not taken into accountinto the shadow price of CO2.
The second dynamic equation in (20) provides the evolution of the shadow
price of CO2 concentration (λmj,t−1 ), as the sum of the net value of CO2 conmm m
centration in the next period (πj,tλj,t) and the marginal value of temperaturemτ τwith respect to CO2 adjusted by the shadow price of temperature (πj,tλ ).
¿From the third dynamic equation in (20) we see that the evolution of
the shadow price of temperature (λτj,t−1 ) depends on three effects of a change
in temperature: the additional aggregate health costs of malaria and asthma
τk k
(πj,t
λj,t); the marginal return on a change in temperature due to additional
τm m
CO2 concentration (πj,tλj,t); and the direct (through the temperature equaττ τtion) and indirect (through output and aerosols) effect (πj,tλj,t ). The magτknitude of the first effect (πj,t ) varies considerably across regions. The adτkverse impact of malaria is larger in warm regions, which means a lower πj,t,14

and thus a higher shadow cost of temperature. In cold regions, which haveno malaria, a reduction of output due to the direct effect of temperatureτkdecreases the health cost of asthma. The higher value of πj,tdecreases the
shadow cost of temperature. However, increasing temperature decreases output and corresponding aerosol emission. As a result, less dimming (brightening) increases the local temperature.

4

The warm-cold rich-poor divide

We shall consider a world consisting of four regions, characterized by only
two features, namely whether the region is warm or cold and whether thepeople are rich, poor or very poor. We denote these four regions by ‘West’,‘China’, ‘India’, and ‘Africa’, respectively. More precisely, we define:• cold rich (‘West’): European Union, North America, Japan;• cold poor (‘China’): China, Eastern Europe;• warm poor (‘India’): India, Pakistan, Bangladesh, Indonesia, Rest of
Asia, Middle East, Latin America; and• warm very poor (‘Africa’): Africa.
There is also a warm rich region, for example Australia, but this region issmall and will be ignored.

IncomeEcon. growth
Population
Temperature
Pop. density
Carbon emission
Aerosol emission
Abatement cost
Health cost

West

China

India

Africahighmoderate
small
low
high
large
large
high
high

low
high
middlelow
low
middlelarge
middlemiddlemiddle
high
large
high
low
middlelarge
middlemiddlevery low
moderate
small
high
low
small
small
low
low

Table 1: Characterization of the four regions
Some characteristics of the four regions are presented in Table 1. The
division of the world based on temperature and wealth only is obviously
15very stylized, but it captures the essence of our story. Our parameters arecalibrated such that they correspond closely to the true geographical areas;
see Appendix A. The four-region model with the calibrated parameter values(the ‘benchmark’ model) is our principal tool for analysis. There is of course
considerable uncertainty about the calibrated parameter values, and we shallinvestigate the sensitivity of our results to parameter uncertainty in Section 5.
The main purpose of our analysis is to illustrate the link between global andlocal climate change, and examine how this link affects economic behavior inheterogeneous regions.
2005
West
China
India
AfricaGlobal34.065
3.400
7.117
0.883

2055

2105

2105

Consumption per capita

69.679 113.398
8.392 16.157
24.843 51.638
3.522
6.371

2.728
0.161
0.173
0.069

5.151
0.392
0.432
0.172

8.292
0.784
0.848
0.315

Global carbon emission

Carbon concentration

7.584

809.4

11.79815.138

0.000
0.000
0.045
0.338

0.000
0.000
0.061
0.366

0.000
0.000
0.093
0.391

Carbon abatement
West
China
India
Africa2055

OutputMalaria patient rate
West
China
India
Africa

2005

0.005
0.000
0.000
0.000

0.161
0.075
0.154
0.068

0.223
0.108
0.228
0.090

1047.51393.8

Asthma patient rate
0.109
0.062
0.059
0.018

0.066
0.061
0.071
0.028

0.050
0.063
0.074
0.027

Aerosol abatement
0.000
0.000
0.000
0.000

0.325
0.097
0.144
0.059

0.452
0.139
0.205
0.092

Table 2: Selected results of the four-region benchmark model
Some selected results from our benchmark model are summarized in Table 2. Along the equilibrium path, output and per capita consumption willcontinue to increase in every region. While West remains the largest economic
power throughout the 100-year time horizon, the growth rates of output andconsumption are both larger in the other three regions. Developing countries
grow at a faster pace than developed countries, because of our assumptions
on initial output and technology efficiency. The growth rates of per capita
16

consumption in India and Africa are, however, relatively small compared totheir output growth rates, especially in the first fifty years. Output in these
two regions will grow rapidly, but per capita consumption will not grow as
rapidly. This is primarily because the number of people who are at risk of or
suffer from diseases will rise, and thus a non-negligible fraction of resourcesmust be used for prevention and treatment.
West
China
India
Africa

6

24

4

23

3

22

2

21

1

20

0

Warm regions (India and Africa)

Cold regions (West and China)

5

25

19
2015

2035

2055

2075

2095

Figure 2: Regional mean temperatures, 2005–2105
The expected increase of malaria patients in warm regions is obviously due
to the temperature change caused by global warming. Global carbon emission
will continue to rise and the level of carbon concentration will be significantly
increased by the end of this century. Consequently, the mean temperaturein each region will be two to three degrees higher in 2105 than in 2005
(Figure 2). Since the risk of malaria depends on regional temperature, anincrease in regional temperature will increase the number of malaria patients,
which in turn implies higher health cost. Notice that this is only the casein India and Africa, because there is no malaria in cold regions. In thecold regions (West and China), temperature change will cause damage only
through direct productivity loss. The relatively slow growth of per capita
consumption in warm regions is partly due to this asymmetric structure ofclimatic damage.

17

West
China
India
Africa

22.5

17.5

12.5

7.5

2.5
2015

2035

2055

2075

2095

Figure 3: Aerosol emission, 2005–2105
West
China
India
Africa

0.12

0.10

0.08

0.06

0.04

0.02

0.00
2

4

6

8

10

12

14

16

Figure 4: Asthma patient rate as a function of aerosol emission

18

In warm regions, not only the number of malaria patients but also thenumber of asthma patients will increase. This contrasts with the situation incold regions, where the fraction of the population suffering from asthma will
decrease or at least stabilize. The sharp reduction of asthma patients in Westfollows from a rapid improvement of air quality (Figure 3), caused by the factthat West is more vulnerable to air pollution and thus more willing to abate
aerosol emission. This is not the case for the other three regions. Figure 4
shows that the slope of the asthma function, representing the vulnerability
to air pollution, is almost the same for China, India, and Africa, but steeper
in West. The four initial states are indicated in the figure. However, only
India and Africa will continue to increase their aerosol emission in the coming
decades.
This is the part of our model where the endogenous local dimming effectbecomes important. In our model, regional temperature is determined not
only by the level of carbon concentration, but also by the amount of local
aerosol emission, which is endogenous and individually controlled by eachregion. Improvement of air quality reduces asthma, but it also intensifies thedamage caused by global warming because the aerosols reduce the amountof sunlight reaching the Earth. Since warm regions will suffer more from arise in temperature, they will be reluctant to promote policies that reduceaerosols. This is why aerosol emission in India and Africa will continue torise while China will manage to stabilize the level of emission. The impact of
local dimming can be seen in the equilibrium regional temperature (Figure 2).
Temperatures in India and Africa exhibit a moderate increase compared withthose in West and China. This indicates that warm regions control regionaltemperature at the cost of air quality. India and Africa will thus be required
to pay more for preventing and treating asthma.
The increase of asthma patients actually matters, especially for Africa.
To clarify this point we plot the development over time of the share of asthma
health cost in total output (Figure 5). In the long run, the economic costassociated with asthma in each region become less important due to economic
growth. But in the short run, Africa will have to keep allocating a constantportion of its disposable income to treating asthma, while the burden ofasthma in the other three regions declines. As a result, consumption in
Africa will be suppressed by aerosol-induced health cost. Since the increaseof asthma patients is a necessary byproduct of Africa’s policy to counteract
rising temperature, one can view this as an indirect cost of global warming.
The carbon and aerosol abatement rates chosen by each region deserve
more careful interpretation. Our benchmark results show that while Westabates carbon emission at the highest rate in the near future, India is likely
to exert an even higher carbon abatement rate in the long run. Recall that
19

West
China
India
Africa

0.018

0.015

0.012

0.009

0.006

0.003

0.000
2015

2035

2055

2075

2095

Figure 5: Share of asthma health cost in output, 2005–2105
0.30
India
Africa0.25
Initial state
0.20

0.15

0.10

0.05
Initial state

0.00
15

17

19

21

23

25

Figure 6: Malaria patient rate as a function of temperature

20

27

what we call ‘India’ is in fact a huge region that covers the entire warm areaon the globe other than Africa. This region thus includes countries which
are located at the edge of the current distribution of malaria (van Lieshout
et al., 2004). Hence it is India which will be the first to suffer if the malariaendemic area is expanded. This feature is captured in our model by assumingthat the malaria function for India is locally convex (Figure 6). Therefore,
marginal damage of malaria expansion is large in this region and will be evenlarger as the regional temperature increases. The cost of carbon abatement
is therefore more likely to be paid off in the long run.
Africa is another region which will suffer from the intensification of malaria.
The marginal damage of temperature change will be large, but the equilibrium level of carbon abatement will be small in Africa. To explain this wenote first that additional damage from temperature increase through malaria
expansion in this region is relatively small. Since Africa is already highly
malaria-endemic, there is little room left for further expansion of the malariaendemic area (van Lieshout et al., 2004). In our model, the malaria function
for Africa is locally concave in order to capture this feature (Figure 6). The
marginal damage of an increase in temperature is thus smaller in Africa thanin India. In other words, Africa is less willing to abate carbon emission compared with India as far as malaria is concerned. This point alone, however,does not provide a complete explanation, because the carbon abatement in
Africa is even smaller than in China, where there is no additional damage
from malaria.
This brings us to the second point: endogenous local dimming. Recall
that each region can control regional temperature either by reducing carbon
emission or by increasing (or not reducing) aerosol emission. Consideringthat the latter option can only be chosen with the side effect of increasing
the number of asthma patients, it might seem that the first option is always
more attractive. However, the second option can be a better way of slowing
down the rise of regional temperature. Global warming is a public bad,and hence the marginal benefit from additional mitigation efforts is limited.
This is especially the case in Africa. As is shown in Figure 7, Africa is thesmallest contributor to global warming. This means that the global trendof increasing temperature is given as an almost complete externality to thisregion. Hence, as long as global warming is mostly beyond control, increasing
aerosol emission is a reasonable way of controlling temperature even though
it is accompanied by air pollution. In fact, the equilibrium level of aerosol
abatement in Africa is very low, which indicates that this region controls
temperature by increasing aerosol emission rather than by reducing carbon
emission.

21

5

West
China
India
Africa

4

3

2

1

0
2015

2035

2055

2075

2095

Figure 7: Carbon emission, 2005–2105
Although the equilibrium path is the optimal choice based on each region’s own welfare maximization, our results might provoke a concern about
equity among regions. The burden of climate change is unequally distributed,
because rising temperature is more harmful in already warm regions, but also
because people living in warm regions will have to live with low air quality.
The indirect burden of global warming (through asthma) is especially large
in Africa despite the fact that this region is least responsible for generating
greenhouse gasses.

5

Parameter uncertainty

To examine the robustness of our results and further clarify their implications, we conducted extensive sensitivity analyses concerning the effects ofchoosing incorrect parameter values. For the parameters which represent a
ratio we increased their values by 0.05 compared to the benchmark value;
for the other parameters we increased their values by up to 50% comparedto the benchmark value. The overall conclusion of the sensitivity analysis
is that our benchmark results are fairly robust. The equilibrium path does
not change much when we use different values for the exogenous parameters.
Hence, in general, the inherent uncertainty surrounding parametrization does22

not entail serious problems in our model. Yet, some of the parameters play
more important roles than others, and below we restrict our attention tothese parameters.
c

Λµ

(1)

pj

a

Λµ
[+50%]

c

a

Λµ

(2)

pj

Λµ
[+50%]

c

Λµ
(1)

qj

a

Λµ
[+50%]

c

a

Λµ

(2)

qj

Λµ
[+50%]

West
China
India
Africa−+−+
0.002 −0.002−0.002 −0.062(1)
uj [+0.05]

0.004 0.007
0.019 0.027
0.011 0.029
0.025 0.071(2)
uj [+0.05]

−
+
−
+
0.002 −0.002−0.003 −0.010(1)βj [+0.05]

0.002 0.004
0.012 0.017
0.007 0.018
0.016 0.045(2)βj [+0.05]

West
China
India
Africa+−+−
−0.012 0.011
0.004 0.092
mcj [+50%]−0.021 −0.039−0.025 −0.035−0.016 −0.042−0.030 −0.093
maj [+50%]

−
+
−
+
0.016 −0.010−0.003 −0.065
ρj [+0.05]

0.018 0.033
0.022 0.031
0.014 0.037
0.026 0.073
χac
j [+50%]

West
China
India
Africa−0.203−−0.202−−0.203 −0.002−0.206 0.005−0.009 −0.209−0.002 −0.203−0.004 −0.202
0.001 −0.201−0.054 −0.007−0.032 −0.005−0.066 0.006−0.045 0.050

0.139 −0.002
0.186 −0.002
0.106+
0.100 −0.002

Table 3: Effects of parametric uncertainty on µc and µa in 2055
In Table 3 we present the effects of changes in various parameters on theabatement rates µc and µa in the year 2055, compared to the benchmarkcaresults. Here, Λµ and Λµ denote the relative deviation of µcj,2055 and µaj,2055(1)
from the benchmarks, respectively. For example, an increase of 50% in pj
will cause µa in Africa to decrease by 6.2% The parameter changes listed in
the table do not much affect the optimal paths of the abatement rates withthree exceptions: the effect of mc on µc , the effect of ma on µa , and (to a lesser
extent) the effect of χac on µc . The parameters mc and ma determine theoverall level of abatement efforts, because they directly change the marginal
abatement cost; see Appendix A.1. Although the effects are in the order of
20%, the qualitative characteristics of the equilibrium path of our benchmark
model are not affected.
The aerosol abatement rate in Africa is more sensitive than those in theother regions. This is probably because the optimal level of aerosol emission
in Africa depends on a complex set of determinants, some of which contradict
23

each other. In warm regions, aerosol emission plays an important role bothin controlling regional air quality and in counteracting global temperaturerise. While this is more or less true for every region, the situation in Africa
is unique. The endogenous local dimming effect is the primary channel oftemperature control in Africa while it is much less important in the otherregions. As discussed in the preceding section, carbon abatement in Africa is
not an efficient way of combating rising temperature. The temperature rise isalmost entirely caused by carbon emission in the other regions. Africa is thus
required to use aerosol emission to alleviate the adverse impact of climatechange. In fact, µaj,2055 is sensitive not only to malaria-related parameters,
but also to asthma-related parameters. This shows that Africa chooses µaj,t
so as to reach a balance between two goals: slowing down the rise in regionaltemperature and improving air quality. Since these two goals work against
each other, the optimal level of aerosol abatement is likely to be unstable.
0.40
West
China
India
Africa

0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
-0.05
2015

2035

2055

2075

2095

Figure 8: Relative deviation of µa from benchmark when ρ is increased by
0.05, 2005–2105
Apart from µc and µa , another parameter of interest is the rate of time
preference, ρj . As people become more impatient, cold regions and warm
regions adjust their aerosol abatement levels in opposite directions: the cold
regions (West and China) abate less while the warm regions (India andAfrica) abate more. An increase of impatience makes people more willing24

to consume and less willing to invest, which in turn decreases output in thesubsequent periods relative to the benchmark level. As a result, the amountof aerosol generated through the production process declines, and this induces lower aerosol abatement rates. Also, lower aerosol emission due tolower production causes local brightening (less dimming) and thus increases
regional temperature. This lessens the incentive to abate aerosol emission
because this would further increase temperature. Although this reasoning
applies to all regions, Africa is much more willing to abate aerosol emissions
when ρj is increased than the other regions (Figure 8), possibly because ahigher discount rate makes it easier for Africa to control local air quality.
This observation is relevant in evaluating climate policies. It is now widely
recognized that the rate of social time preference plays an important, possibly decisive, role in policy evaluations for long-term environmental problems
such as climate change. Stern (2007) chooses a small value for the rate ofsocial time preference in consideration of inter-generational equity. Nordhaus (2008), on the other hand, chooses a relatively high value for the same
parameter to ensure consistency between the model and real-world economic
data. These different values have different policy implications. The discussion what the correct value of ρ is takes place mostly in the context of intergenerational equity. Our results indicate, however, that assumptions about
the social time preference rate do not only affect the inter-generational, butalso the intra-generational welfare distribution. A low discount rate shifts
the cost of climate change from future generations to the present generation.
Such a shift of burden is more demanding for warm regions in the sense thatthe present generation living in a warm region would be likely to have moredifficulty in controlling local air pollution. In other words, while a lower rateof time preference implies inter-generationally more equitable climate policies, it implies at the same time intra-generationally less equitable burden
sharing.
Finally, after discussing µc , µa , and ρ, we consider the sensitivity of χac ,the parameter representing the potential of co-benefits. The results imply
that if there are more opportunities of gaining co-benefits, every region will beable to abate more carbon emission. This is as expected, because a decreaseof aerosol emission accompanied by carbon abatement is just an additional
marginal benefit of climate policies. Thus, once the potential co-benefitsof climate policy are recognized in policy evaluations, recommendations forstronger carbon abatement would logically follow.
This conclusion might however be too optimistic. Table 3 shows that the
optimal carbon abatement paths of warm regions are relatively insensitive toχac
j . Figure 9 helps to clarify this point. The figure plots the relative deviation of µc when the value of χac is raised by 50%. The air quality co-benefits
25

0.20

0.16

0.12

0.08

West
China
India
Africa

0.04

0.00
2015

2035

2055

2075

2095

Figure 9: Relative deviation of µc from benchmark when χac is increased by
50%, 2005–2105
do provide an additional incentive to abate carbon emission, but such an
incentive is significantly suppressed in warm regions. This means that thelogic of co-benefits may not work well for warm regions, where the potentialof co-benefits is much needed to achieve low-carbon development. Two factors may be working together to generate this rather alarming result. First,
the co-benefit is not completely a ‘benefit’ in our model. Carbon mitigation
efforts can improve local air quality, but such improvements might offset theeffectiveness of the climate policy through the endogenous local dimming
effect. This dilemma makes all regions reluctant to enjoy the air quality
co-benefits. The difference observed in the responses of cold and warm regions is explained by the second factor: warm regions are more vulnerable totemperature increase. In addition to the general productivity loss incurredfrom climate change, warm regions are likely to suffer from intensificationand expansion of temperature-induced diseases. Hence, the secondary benefit of improved air quality is largely canceled out by the endogenous dimming
effect. In fact, this effect seems so strong in Africa that the co-benefit almost
completely disappears in the near term. This implies that, while the argument for the existence of co-benefits could be a good reason to promote more
ambitious reduction targets for cold regions, this may not necessarily be the26case for warm regions. Without appropriate consideration of local dimming,
policy recommendations can possibly impose unfairly large burdens on warm
regions.

6

Conclusions

While climate change is a global problem, the adverse impacts of an increasein temperature will not be equally distributed across regions. The same
degree of temperature change can cause different damages in different regions,reflecting the diversity of geographical and economic situations around theworld. The health impact is a prime example where different regions responddifferently to climate change, thus emphasizing the importance of explicitly
considering both global and local damages in the economic analysis of climatechange. Another important channel through which climate change interacts
with local issues is aerosols. Aerosol particulates counteract global warming
by preventing sunlight to fall on the Earth, and they act primarily locally,in contrast to CO2 emissions which act primarily globally. While this local
dimming effect could help each region reduce the adverse impact of climatechange, the aerosols cause local air pollution and thus increase the risk of
respiratory diseases.
With this background in mind, we looked at the interplay between climate, health, and the economy based on a simple integrated assessment
model. We presented a stylized world with four heterogeneous regions, designed to capture the links between local and global aspects of climate change.
If health and dimming are both taken into account, then the equilibrium
paths provide some novel insights.
First, warm regions will continue to increase their aerosol emissions while
cold regions will manage to improve the local air quality. As a result, people living in relatively warm regions will have to suffer more from asthma.
The aerosol-induced health cost will constrain consumption for the coming
decades, especially in Africa. Considering the fact that those warm regions
are already suffering from increasing temperature, this is a serious and alarming issue.
Second, the existence of air quality co-benefits does not always support
more stringent CO2 emission reduction targets. Our results illustrate thatthe value of air quality co-benefits is large in cold regions. In warm regions,however, the benefit from air quality improvement is largely offset by local
brightening (less dimming). This provides yet another concern about thevulnerability of warm regions, Africa in particular.
Third, in the context of climate change, discounting can be an issue of27

intra-generational equity as well as inter-generational equity. Our sensitivity
analysis indicates that the choice of social time preference rate affects the
optimal abatement paths of different regions in different ways. Hence, carefulattention to local implications of climate change is essential in the discussionof discounting.
Many questions remain. One may ask, for example, whether there are potential benefits of cooperation, and, if so, what they are. Our results suggestthat cooperation between heterogeneous regions would better address thehighly disproportional burden of climate change. Theoretically, this could
be done by introducing cooperative game-theoretic concepts. Analyzing thepossibility of such inter-regional cooperation should enable us to derive implications both from an environmental and from a socio-economic point ofview.

AppendicesA

Specification of the exogenous variables andchoice of parameter values

A.1

Exogenous trends

The exogenous trends for population, total factor productivity, carbon intensity, and sulfur intensity are all specified in the same way:n
Nj,t+1 = (1 + gj,t
)Nj,t,

nn
gj,t+1= (1 − δjn )gj,t,ψ
ψj,t+1 = (1 + gj,t
)ψj,t ,

ψψ
gj,t+1= (1 − δ ψ )gj,t
,

σc
cc
cc
σj,t+1= (1 − gj,t
)σj,t
,

σc
σc
gj,t+1= (1 − δ σc )gj,t
,

σa
aa
aa
σj,t+1= (1 − gj,t
)σj,t
,

σa
σa
gj,t+1= (1 − δ σa )gj,t.

The population trend is based on UNPD (2008). We directly input the pron
jected population for the first three periods and then chose gj,2025and δjnsuch that the model matches the future prediction thereafter. The parameters governing productivity and carbon intensity are basically the same as in
Nordhaus (2008). The last of these four equations was calibrated based on
IPCC (2000). In particular, we used the MESSAGE-B2 scenario to determineaa
the trajectory of σj,t.
The marginal abatement costs are assumed to decline over time. We

28

c
a
follow Nordhaus (2008) and specify αj,tand αj,t
as
cc
 c

σj,t
c
mc t
c
m
υ
+
(1
−
g
)
(1
−
υ
)
j
ξjc
aa


σj,t
a
a
αj,t
= a maj υ a + (1 − g m )t (1 − υ a )
ξj

c
αj,t
=

(0 < υ c < 1),(0 < υ a < 1).

The values of mcj and maj are chosen so that the abatement costs are differentiated across regions in a way which is consistent with the descriptive
characteristics listed in Table 1.

A.2

Temperature

Our temperature equation extends the corresponding equation in Nordhaus(2008). We begin with the following simplified version of temperature dynamics in Nordhaus’ DICE model:


F×2
∗
Zt+1 = Zt + ς Ft −(Zt − Z ) ,Z×2 − Z ∗where Ft is the radiative forcing at period t, F×2 is the estimated radiative
forcing when carbon concentration is doubled relative to the year 1750, andZ×2 is the equilibrium temperature when radiative forcing is on the level of
F×2 . Nordhaus (2008) defines Ft by
Ft = F c (Mt ) + Fta ,where F c (Mt ) and Fta are the radiative forcings by carbon dioxide and otherrelated gasses, respectively. In the DICE model, the latter term is exogenously given while the former is defined as
F c (Mt ) = ∆c×2

log(Mt /M1750 ).
log 2This means that if carbon concentration is doubled (that is, Mt = 2M1750 ),then the radiative forcing of carbon dioxide will be ∆c×2 .
For our purpose two modifications are required: we need regional rather
than global temperature, and we need the aerosol radiative forcing to beendogenous rather than exogenous. This is achieved by changing the threeequations to:



F×2,j
∗
Zj,t − Zj,
Zj,t+1 = Zj,t + ς Fj,t −Z×2,j − Zj∗29

a
Fj,t = F c (Mt ) + Fja (Ej,t),

andlog(Mt /M1750 ),log 2
and assuming that the radiative forcing from aerosol emissions is endogenously determined by
F c (Mt ) = ∆c×2

a
Fja (Ej,t) = ∆a0,j + ∆adiraaalog(1 + Ej,t
/Ej,nat
)
Ej,t
a
+
∆
.
ind
a
a
a
Ej,1990log(1 + Ej,1990 /Ej,nat )The latter specification is based on Harvey et al. (1997). Here, ∆adir and∆aind are the direct and indirect radiative forcings caused by aerosols in theaaa
atmosphere when Ej,t
= Ej,1990, and the symbol Ej,nat
denotes the amountof natural aerosol emission.
Based on these equations the temperature equation boils down to Equation (15):Zj,t+1 = τ0,j + τ1,j Zj,t + τ2 log(Mt )aa+ τ3,j Ej,t
+ τ4,j log(1 + τ5,j Ej,t
),
where


F×2
a
c log(M1750 )∗τ0,j = ς ∆0,j − ∆×2
Z ,
+
log 2
Z×2,j − Zj∗ jς∆c×2
ςF×2,j,τ=,τ1,j = 1 −2
Z×2,j − Zj∗
log 2
ς∆a
ς∆aind1
τ3,j = a dir ,τ4,j =,
τ5,j = a ,aaEj,1990log(1 + Ej,1990 /Ej,nat )Ej,natand
F×2,j = ∆c×2 + ∆a0,j + ∆adir + ∆aind .
We chose the value of ∆a0,j such that the time-path of temperature generatedby (15) mimics the historical temperature data from 1960 to 2000.

A.3

Health-related parameters

A key feature of our model is the treatment of health, and in particular thetwo types of disease: malaria (temperature induced) and asthma (aerosol induced). We assume that there is no malaria in cold regions, because malariacarrying mosquitoes cannot survive when the temperature is below a certain
threshold. The marginal impact on malaria at temperatures above about30

23◦ C is larger in India than in Africa, because of the fact that Africa is already highly endemic for malaria so that the effect of a further increase intemperature is limited; see the discussion in van Lieshout et al. (2004). In
warm countries outside Africa, on the other hand, the marginal health impact
may be large. This feature is incorporated into our model by assuming thatthe malaria functions for Africa and India are locally concave and convex,
respectively.
The slope of the asthma function of West is steeper than of the otherregions. In West the population is more concentrated, and this makes theregion more vulnerable to air pollution. The marginal benefit of abating
aerosol emission is therefore larger in West. In the other regions, the marginal
health impact of air pollution is more or less the same because the values ofνj are not much different.
Relatively large uncertainty remains in the choice of health-related parameters. The cost of treating and preventing malaria in Africa is based on
Guiguemde et al. (1994), Chima et al. (2003), and Chuma et al. (2006).
These values are scaled up for the other regions on the basis of the level of
economic development. The treatment cost of asthma in West and India is inline with the studies of Ungar et al. (1998), Serra-Batlles et al. (1998), Chew
et al. (1999), Aı̈t-Khaled et al. (2000), and Cisternas et al. (2003). These(1)
numbers are scaled down for the poor regions. The malaria function rj,t for
Africa is calibrated based on the data of Korenromp (2005). There is somearbitrariness in the choice of parameters for the malaria function in India.
The asthma function is calibrated so that the function is consistent with thedata provided by Masoli et al. (2004). Sensitivity analysis is required to see
whether the uncertainty surrounding those parameters changes our results,
and this analysis is provided in Section 5.

A.4

Specification of νj

Aerosol emissions cause air pollution, and the air pollution increases thefraction of population at risk of asthma. The impact of air pollution is not
the same across different regions. Even if the amount of emission were thesame, the health impact of air pollution must be different depending on how
large the region is and how the population is distributed within the region.
We introduce a region-specific parameter νj to account for this and we assumeaathat the number of asthma patients depends on νj Ej,t
, rather than on Ej,t.
We obtain the value of νj as follows. First, divide region j into kj gridcells or ‘provinces’. The size of each province is the same not only within
one region, but also across regions. Suppose there are Njk people living in
the k-th province (k = 1, 2, . . . , kj ). Then the average number of people31per province in region j is given by N j = Nj /kj , where Nj is the total
population of region j. Let kj∗ denote the number of provinces within region j
where Njk ≥ N j (UNEP/GRID, 1997). We then assume that the fraction of
population at risk of asthma depends on
 
a
Ej,t
kj
a
,
νj Ej,t =AREAj kj∗
where AREAj is the geographical size of region j. The first component,aEj,t/AREAj , represents the average level of air pollution while the second
component, kj /kj∗ , captures the population distribution in the region. Noticethat the latter component scales the impact of air pollution upwards when
the population is concentrated in a small part of the region. For example,
if the majority of the population lives in only half of the total area, thenkj /kj∗ = 2, and the impact is doubled.

A.5

Other variables and parameters

The emission data of carbon dioxide were taken from USEIA (2006). We
used sulfur emission as a representative index of aerosols in the atmosphere.
The sulfur emission data are based on Stern (2005). The GDP data of IMF(2010) were used for the initial output of each region. The regional mean
temperature was calculated on the basis of Mitchell et al. (2004). The dataof carbon concentration come from Keeling et al. (2001).

B

Specification of the π coefficients

As mentioned in Section 3, to find the expressions of the π coefficients issomewhat tedious. These are presented below. From (17) we write(dYj,t) = Γcj,t(dµcj,t) + Γaj,t (dµaj,t) + Γkj,t (dKj,t) + Γτj,t (dZj,t).
We present the coefficients in three groups. First, the coefficients with respect
to capital:
(2)
∂aj,t
(2) ∂rj,tck
ac
πj,t = − c Yj,t + θj,t
Nj,t σj,t
Yj,t
a
∂µj,t
∂Ej,t
(2)
(2) ∂rj,t
Nj,t eaj,t Γcj,t + (1 − aj,t )Γcj,t,− θj,ta∂Ej,t32

Symbol

Value

Description

Unit

ρj
0.344 Pure time preference rate per decade—ωj
1 Natural labor-population ratio—
j
0.3 Capital’s share of income—
γj
0.00284 Damage coefficient—
M2005
809 Carbon concentration (2005)
GtCcδ
0.0524 Carbon depreciation rate per decade—cζ
0.47 Carbon retention rate per decade—ς
0.02 Parameter in temperature equation—o∗
Z×2,j − Zj
3 Temperature change when CO2 doubled
Cc∆×2
3.8 CO2 radiative forcing when CO2 doubled
Wm−2
∆adir
−0.3 Aerosol direct radiative forcing (1990)
Wm−2
∆aind
−0.8 Aerosol indirect radiative forcing (1990)
Wm−2
M1750
596 Carbon concentration (1750)
GtC
(1)
uj
0.5 Success rate of malaria prevention—(2)uj
0.2 Success rate of asthma prevention—cυ
0.5 Ratio of initial to final abatement cost—aυ
0.5 Ratio of initial to final abatement cost—cgm
0.05 Convergence rate of carbon abatement cost—ma0.05 Convergence rate of aerosol abatement cost—gk
δ0.651 Capital depreciation rate per decade—
Table 4: Global parameter values
(2)

ak
πj,t
=−

∂aj,t
(2) ∂rj,taa
Yj,t + θj,t
Nj,t σj,t
Yj,t
a
a
∂µj,t
∂Ej,t

(2)
(2) ∂rj,t
Nj,t eaj,t Γaj,t + (1 − aj,t )Γaj,t,− θj,ta∂Ej,t(2)(2) ∂rj,tkk
kπj,t = (1 − δj ) − θj,t
Nj,t eaj,t Γkj,t + (1 − aj,t )Γkj,t ,
a
∂Ej,t

33

West
China
India
Africa

West
China
India
Africa

West
China
India
AfricaNj,2025n
gj,2025

δjn

Kj,2005

Zj,2005

Zj∗

10.46
17.55
38.62
12.29

0.0166-0.0084
0.07560.13050.37280.04060.30980.617865.8065.730
11.330
1.123

3.85
0.22
21.14
22.05

2.84
-0.55
21.17
21.58

Yj,2005

ψj,2005ψ
gj,2005δjψa
Ej,1990aEj,nat34.065
3.400
7.117
0.883

2.100
0.298
0.336
0.206

0.065
0.095
0.095
0.085

0.001
0.001
0.001
0.001

27.26
16.82
12.65
3.82

18.94
11.69
8.72
2.65

∆a0,j

νj

mcj

maj

ξjc

ξja

1.47271.87590.17340.72340.02140.01200.01020.0128

3.00
2.00
2.00
1.00

3.00
2.00
2.00
1.00

2.8
2.8
2.8
2.8

κj

(1)

βj

25.00
25.00
25.00
20.00

0.95
0.95
0.95
0.95

1.0
1.0
1.0
1.0

(1)

βj
West
China
India
Africa

West
China
India
Africa

West
China
India
Africa

(1)

ηj

(2)

(2)

ηj

2.8
2.8
2.8
2.8
(2)

κj

0.00
0.00
0.57
0.83

10
10
10
15

cc
σj,2005

σc
gj,2005

δjσc

aa
σj,2005

σagj,2005

δjσa

0.104
0.644
0.227
0.343

0.07240.07240.07240.07240.02960.02960.02960.0296

0.428
3.479
2.180
4.714

0.19050.18050.19050.18050.06440.06440.06440.0644

χca
j

χac
j

qj

pj

(1)

qj

pj

0.15
0.45
0.45
0.45

0.020
0.012
0.012
0.006

0.020
0.012
0.012
0.006

0.120
0.040
0.040
0.020

0.060
0.020
0.020
0.010

0.0
0.0
0.0
0.0

(1)

(2)

Table 5: Calibrated parameter values

34

2.00
2.00
2.00
2.00

(2)

and
(1)
(1) ∂rj,tτkπj,t= −θj,t∂Zj,t(2)(2) ∂rj,t
Nj,t eaj,t Γτj,t + (1 − aj,t )Γτj,t.
a∂Ej,t

Nj,t − θj,t

Next the coefficients with respect to CO2 concentration:
cm
cc
πj,t
= −ζ c σj,t
Yj,t + ζ cecj,t Γcj,t ,

am
ca
πj,t
= −ζ c σj,t
Yj,t + ζ c ecj,t Γaj,t,

and
km
πj,t
= ζ c ecj,tΓkj,t ,mm
πj,t= 1 − δc,τmπj,t
= ζ c ecj,tΓτj,t .

And finally the coefficients with respect to temperature:
cτ
πj,t
=−

∂Zj,t+1 ac∂Zj,t+1 a c
σj,t Yj,t +ej,t Γj,t ,
a
a
∂Ej,t
∂Ej,t

aτ
πj,t
=−

∂Zj,t+1 a a∂Zj,t+1 aa
σj,t Yj,t +ej,t Γj,t,
a
a
∂Ej,t
∂Ej,t

and
kτ
πj,t
=

∂Zj,t+1 a kej,t Γj,t,
a
∂Ej,t

mτ
πj,t
=

∂Zj,t+1
,
∂Mt

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