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Robustness of a Simple Rule for the Social Cost of Carbon

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  • Armon Rezai
  • Rick Van der Ploeg

Abstract

The optimal social cost of carbon is in general equilibrium proportional to GDP if utility is logarithmic, production is Cobb-Douglas, depreciation in 100% every period, climate damages as fraction of production decline exponentially with the stock of atmospheric carbon, and fossil fuel extraction does not require capital. The time profile and size of the optimal carbon tax corresponding to this simple formula are not robust to more convex climate damages, smaller elasticities of factor substitution and varying coefficients of relative intergenerational inequality aversion. The optimal timing of energy transitions and the amount of fossil fuel reserves to be locked up in the earth are also not well predicted by this framework. Still, in terms of welfare and global warming the simple formula manages to get quite close to the first best.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4703.

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Date of creation: 2014
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Handle: RePEc:ces:ceswps:_4703

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Related research

Keywords: social cost of carbon; Ramsey growth; climate damages; energy transitions; stranded fossil; fuel assets; robustness;

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References

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  1. Ackerman, Frank & Stanton, Elizabeth A., 2012. "Climate risks and carbon prices: Revising the social cost of carbon," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 6(10), pages 1-25.
  2. Armon Rezai, 2011. "The Opportunity Cost of Climate Policy: A Question of Reference," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 113(4), pages 885-903, December.
  3. Brock, William A. & Mirman, Leonard J., 1972. "Optimal economic growth and uncertainty: The discounted case," Journal of Economic Theory, Elsevier, Elsevier, vol. 4(3), pages 479-513, June.
  4. Golosov, Mikhail & Hassler, John & Krusell, Per & Tsyvinski, Aleh, 2011. "Optimal taxes on fossil fuel in general equilibrium," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8527, C.E.P.R. Discussion Papers.
  5. Armon Rezai & Frederick van der Ploeg, 2014. "Abandoning Fossil Fuel; How fast and how much?," OxCarre Working Papers, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford 123, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  6. John Hassler & Per Krusell, 2012. "Economics and Climate Change: Integrated Assessment in a Multi-Region World," NBER Working Papers 17757, National Bureau of Economic Research, Inc.
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