Effective climate policies in a dynamic North-South model

•Two-region endogenous growth model with global pollution.•Analyze two policies to help the South: pollution mitigation policy vs. traditional income transfer.•Policies are supported by the same tax rate from the North.•Mitigation policy is more efficient than income transfer for both countries.•Results are robust when extending to trade and different source of pollution.

The paper develops a two-region endogenous growth model with climate change affecting the countries' capital stocks negatively. We compare two different policies aimed at supporting less developed countries: climate mitigation by developed countries, which moderates the increase in stock pollution and hence capital depreciation, and income transfers in the tradition of development aid. Under a mild set of assumptions we find that active climate policies are more efficient for developed economies and also, remarkably, better for developing countries than additional development aid. The main reason is the difference between the two policies with respect to their effects on economic growth. The results are robust with respect to possible model extensions.