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Optimal carbon pricing in general equilibrium: Temperature caps and stranded assets in an extended annual DSGE model

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  • van der Ploeg, Frederick
  • Rezai, Armon

Abstract

The general equilibrium model developed by Golosov et al. (2014), GHKT for short, is modified to allow for additional negative impacts of global warming on utility and productivity growth, mean reversion in the ratio of climate damages to production, labour-augmenting technical progress, and population growth. We also replace the GHKT assumption of full depreciation of capital each decade by annual logarithmic depreciation. Furthermore, we allow the government to use a lower discount rate than the private sector. We derive a tractable rule for the optimal carbon price for each of these extensions. We then simplify the GHKT model by making temperature a linear function of cumulative emissions and making the proportion of output lost due to global warming a linear function of temperature. Finally, we consider how the rule for the optimal carbon price must be modified to allow for a temperature cap, and what this implies for stranded oil and gas reserves. We illustrate our analytical results with a range of optimal policy simulations.

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  • van der Ploeg, Frederick & Rezai, Armon, 2021. "Optimal carbon pricing in general equilibrium: Temperature caps and stranded assets in an extended annual DSGE model," Journal of Environmental Economics and Management, Elsevier, vol. 110(C).
    • Handle: RePEc:eee:jeeman:v:110:y:2021:i:c:s0095069621000875
    DOI: 10.1016/j.jeem.2021.102522
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    2. Abiry, Raphael & Ferdinandusse, Marien & Ludwig, Alexander & Nerlich, Carolin, 2022. "Climate change mitigation: How effective is green quantitative easing?," ZEW Discussion Papers 22-027, ZEW - Leibniz Centre for European Economic Research.
    3. Laeven, Luc & Popov, Alexander, 2023. "Carbon taxes and the geography of fossil lending," Journal of International Economics, Elsevier, vol. 144(C).
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    More about this item

    Keywords

    Carbon price; Tractable rule; General equilibrium; Utility and growth damages; Technical progress; Population growth; Logarithmic depreciation; Differential discount rates; Temperature cap; Stranded oil and gas reserves;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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