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The Optimal Carbon Tax and Economic Growth: Additive versus Multiplicative Damages

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  • Armon Rezai
  • Frederick van der Ploeg
  • Cees Withagen

Abstract

In a calibrated integrated assessment model we investigate the differential impact of additive and multiplicative damages from climate change for both a socially optimal and a business-as-usual scenario in the market economy within the context of a Ramsey model of economic growth. The sources of energy are fossil fuel which is available at a cost which rises as reserves diminish and a carbon-free backstop supplied at a decreasing cost. If damages are not proportional to aggregate production output, and the economy is along a development path, the social cost of carbon and the optimal carbon tax are smaller as damages can more easily be compensated for by higher output. As a result, the economy switches later from fossil fuelto the carbon-free backstop and leaves less fossil fuel in situ. This is in contrast to a partial equilibrium analysis with damages in utility rather than in production which finds that the willingness to forsake current consumption to avoid future global warming is higher (lower) under additive damages in a growing economy if the elasticity of intertemporal substitution is smaller (bigger) than one.

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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-05/12.

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Length: 27 pages
Date of creation: 10 Sep 2012
Date of revision:
Handle: RePEc:eus:ce3swp:0512

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Keywords: climate change; multiplicative damages; additive damages; integrated assessment models; Ramsey growth model; fossil fuel; carbon-free backstop;

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References

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  1. Acemoglu, Daron & Aghion, Philippe & Bursztyn, Leonardo & Hemous, David, 2010. "The Environment and Directed Technical Change," Seminar Papers 762, Stockholm University, Institute for International Economic Studies.
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Citations

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Cited by:
  1. Moreaux, Michel & Withagen, Cees, 2013. "Climate Change and Carbon Capture and Storage," TSE Working Papers 13-393, Toulouse School of Economics (TSE).
  2. Michel Moreaux & Cees Withagen, 2014. "Fluctuating Climate Changes Induced by Optimal Carbon Capturing Policies," Working Papers 2014.01, FAERE - French Association of Environmental and Resource Economists, revised May 2014.
  3. Frederick van der Ploeg & Cees Withagen, 2013. "Global Warming and the Green Paradox," OxCarre Working Papers 116, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  4. Lucas Bretschger & Christos Karydas, 2013. "Optimum Growth and Carbon Policies with Lags in the Climate System," CER-ETH Economics working paper series 13/184, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  5. Sjak Smulders & Michael Toman & Cees Withagen, 2014. "Growth Theory and "Green Growth"," OxCarre Working Papers 135, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  6. Mark Kagan, 2012. "Climate Change Skepticism in the Face of Catastrophe," Tinbergen Institute Discussion Papers 12-112/VIII, Tinbergen Institute.

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