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Optimum Growth and Carbon Policies with Lags in the Climate System

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Abstract

We study the effects of greenhouse gas emissions on optimum growth and environmental policy by using an expansion-in-varieties growth model with polluting non-renewable resources. Climate change harms the capital stock. Our main contribution is to introduce and extensively explore the naturally determined time lag between greenhouse gas emission and the damages due to climate change which proves to be crucial for the transition of the economy towards its steady state. The social optimum and optimal abatement policies are fully characterized. The inclusion of a green technology delays optimal resource extraction. The optimal tax rate on emissions is proportional to output. Poor understanding of the emissions dissusion process leads to suboptimal carbon taxes and suboptimal growth and resource extraction.

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Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 13/184.

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Length: 30 pages
Date of creation: Nov 2013
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Handle: RePEc:eth:wpswif:13-184

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Keywords: Non-Renewable Resource Extraction; Climate Policy; Optimum Growth; Pollution Di usion lag.;

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  1. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(5), pages S71-102, October.
  2. Ryo Horii & Masako Ikefuji, 2010. "Natural Disasters in a Two-Sector Model of Endogenous Growth," Working Papers, Economic Growth Center, Yale University 992, Economic Growth Center, Yale University.
  3. William D. Nordhaus, 1992. "Rolling the 'Dice': An Optimal Transition Path for Controlling Greenhouse Gases," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1019, Cowles Foundation for Research in Economics, Yale University.
  4. Gene M. Grossman & Elhanan Helpman, 1993. "Innovation and Growth in the Global Economy," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262570971, December.
  5. Armon Rezai & Frederick van der Ploeg & Cees Withagen, 2012. "The Optimal Carbon Tax and Economic Growth: Additive versus multiplicative damages," OxCarre Working Papers, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford 093, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  6. Philippe Michel & Gilles Rotillon, 1995. "Disutility of pollution and endogenous growth," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 6(3), pages 279-300, October.
  7. Lans Bovenberg, A. & Smulders, Sjak, 1995. "Environmental quality and pollution-augmenting technological change in a two-sector endogenous growth model," Journal of Public Economics, Elsevier, Elsevier, vol. 57(3), pages 369-391, July.
  8. Olli Tahvonen, 1997. "Fossil Fuels, Stock Externalities, and Backstop Technology," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 30(4), pages 855-74, November.
  9. Grimaud, André & Magné, Bertrand & Rougé, Luc, 2009. "Polluting Non-Renewable Resources, Carbon Abatement and Climate Policy in a Romer Growth Model," TSE Working Papers, Toulouse School of Economics (TSE) 09-023, Toulouse School of Economics (TSE).
  10. Hoel, Michael & Kverndokk, Snorre, 1996. "Depletion of fossil fuels and the impacts of global warming," Resource and Energy Economics, Elsevier, Elsevier, vol. 18(2), pages 115-136, June.
  11. Lucas Bretschger & Simone Valente, 2011. "Climate Change and Uneven Development," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 113(4), pages 825-845, December.
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