Climate Policy with Gains from Scale : Is China the Optimal Policymaker?

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Comerford, David and Dzido, Slawomir (2026) Climate Policy with Gains from Scale : Is China the Optimal Policymaker? Discussion paper. University of Strathclyde, Glasgow.

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Abstract

We build a Climate-economy IAM incorporating a monopolistically competitive supply side (Krugman, 1980) resulting in a model featuring increasing returns to scale. Optimal policy is both a carbon tax to shift composition towards low carbon sectors, and an investment subsidy to boost the size of the capital stock. Our main theoretical result is that the optimal carbon tax is decreasing in the the degree of increasing returns to scale in the economy. We use this model to look at Chinese overcapacity in manufactures, explaining the combination of cheap finance enabled investments in the capacity to create vast scale in EV and solar panel manufactures.

ORCID iDs

Comerford, David ORCID logoORCID: https://orcid.org/0000-0002-5541-736X and Dzido, Slawomir;
CORE (COnnecting REpositories)