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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. Nikita Lyssenko & Leslie M. Shiell, 2004. "Computing Business-as-Usual with a Representative Agent and a Pollution Externality," Working Papers, University of Ottawa, Department of Economics 0409E, University of Ottawa, Department of Economics.
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  10. Frederick van der Ploeg & Cees Withagen, 2010. "Is there really a Green Paradox?," Tinbergen Institute Discussion Papers, Tinbergen Institute 10-020/3, Tinbergen Institute, revised 27 Aug 2012.
  11. Reyer Gerlagh & Matti Liski, 2012. "Carbon Prices for the Next Thousand Years," CESifo Working Paper Series, CESifo Group Munich 3855, CESifo Group Munich.
  12. Rezai, Armon, 2010. "Recast The Dice And Its Policy Recommendations," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 14(S2), pages 275-289, November.
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Cited by:
  1. Frederick van der Ploeg & Cees Withagen, 2013. "Global Warming and the Green Paradox," OxCarre Working Papers, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford 116, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  2. Moreaux, Michel & Withagen, Cees, 2013. "Climate Change and Carbon Capture and Storage," LERNA Working Papers, LERNA, University of Toulouse 13.03.390, LERNA, University of Toulouse.
  3. Lucas Bretschger & Christos Karydas, 2013. "Optimum Growth and Carbon Policies with Lags in the Climate System," CER-ETH Economics working paper series, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich 13/184, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  4. Sjak Smulders & Michael Toman & Cees Withagen, 2014. "Growth Theory and "Green Growth"," OxCarre Working Papers, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford 135, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  5. 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.
  6. Mark Kagan, 2012. "Climate Change Skepticism in the Face of Catastrophe," Tinbergen Institute Discussion Papers, Tinbergen Institute 12-112/VIII, Tinbergen Institute.

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