The Optimal Carbon Tax and Economic Growth: Additive versus Multiplicative Damages
AbstractIn 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 InfoPaper provided by European University at St. Petersburg, Department of Economics in its series CEEES Paper Series with number CE3S-05/12.
Length: 27 pages
Date of creation: 10 Sep 2012
Date of revision:
climate change; multiplicative damages; additive damages; integrated assessment models; Ramsey growth model; fossil fuel; carbon-free backstop;
Other versions of this item:
- Armon Rezai & Frederick van der Ploeg & Cees Withagen, 2012. "The Optimal Carbon Tax and Economic Growth: Additive versus multiplicative damages," OxCarre Working Papers 093, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-06 (All new papers)
- NEP-DGE-2012-12-06 (Dynamic General Equilibrium)
- NEP-ENE-2012-12-06 (Energy Economics)
- NEP-ENV-2012-12-06 (Environmental Economics)
- NEP-FDG-2012-12-06 (Financial Development & Growth)
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