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CLIMATE POLICY AND CATASTROPHIC CHANGE: Be Prepared and Avert Risk

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  • Frederick van der Ploeg
  • Aart de Zeeuw

Abstract

The optimal reaction to a pending climate catastrophe is to accumulate capital to be better prepared for the disaster and levy a carbon tax to reduce the risk of the hazard by curbing global warming. The optimal carbon tax consists of the present value of marginal damages, the non-marginal expected change in welfare caused by a marginal higher risk of catastrophe, and the expected loss in after-catastrophe welfare. The last two terms offset precautionary capital accumulation. A linear hazard function calibrated to an expected time of 15 years for a 32% drop in global GDP if temperature stays at 6 degrees Celsius implies with a discount rate of 1.4% a precautionary return of 1.6% and a carbon tax of 136 US $/tC. More intertemporal substitution lowers precautionary capital accumulation and lessens the need for a high carbon tax, but implies less intergenerational inequality aversion which pushes up the carbon tax.

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Bibliographic Info

Paper provided by European University at St. Petersburg, Department of Economics in its series CEEES Paper Series with number CE3S-02/13.

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Length: 44 pages
Date of creation: 01 Oct 2013
Date of revision:
Handle: RePEc:eus:ce3swp:0213

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Keywords: non-marginal climate policy; tipping points; risk avoidance; economic growth; social cost of carbon; precaution; adaptation capital;

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Cited by:
  1. Rick Van der Ploeg, 2013. "Abrupt Positive Feedback and the Social Cost of Carbon," Economics Series Working Papers OxCarre Research Paper 12, University of Oxford, Department of Economics.

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