As climate changes and natural disasters intensify, the threat of large and sudden human displacement increases. This paper explores how carbon should be taxed in the presence of international displacement caused by climate change. It first provides empirical evidence on the migration response to natural disasters from developing to developed countries. Second, it introduces climate refugees into a climate-economy growth model and theoretically characterizes global and unilateral optimal carbon prices taking into account the economic and social impact of climate refugees. Third, it quantifies global and unilateral carbon prices in a North-South calibration. The main finding is that forced migration enhances the incentives of host regions to fight climate change—with a 26% increase in the unilateral carbon price, more so if political conflict is taken into account. This stands in contrast to the global and the unilateral policy in origin regions, which barely change in magnitude after accounting for the presence of climate refugees.
Host: Christian Traeger