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Precautionary Climate Change Policies and Optimal Redistribution

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  • Bas Jacobs
  • Rick van der Ploeg

Abstract

We analyse optimal carbon taxes, optimal redistribution within and between non-overlapping generations, and optimal spending levels on climate abatement and adaptation. A positive probability of unexpected large increases in CO2 emissions results in a lower discount rate for global warming damages. More prudent governments set higher carbon taxes and spend more on abatement and sacrifice intra-generational for inter-generational redistribution. As long as households spend a constant fraction of their income on polluting goods, the carbon tax is not used for redistribution and is set at the modified Pigouvian rate, which is higher than the Pigouvian rate if governments are prudent. However, the carbon tax is set below the modified Pigouvian rate if poor households spend relatively more on polluting goods than rich households (Stone-Geary preferences). Policy simulations give insights into the effects of changes in the probability of climate disaster, degrees of intra- and inter-generational inequality aversion, ease of substitution between clean and dirty goods, elasticity of labour supply, productivity of abatement and adaptation, population growth and economic growth on the rates of discount, inequality, global warming and social welfare.

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Bibliographic Info

Paper provided by Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford in its series OxCarre Working Papers with number 049.

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Date of creation: 2010
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Handle: RePEc:oxf:oxcrwp:049

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Related research

Keywords: global warming; intra-generational and inter-generational redistribution; equally-distributed-equivalent utility; social discount rate; prudence; carbon tax; income tax; CO2 abatement; climate adaptation; non-homothetic preferences.;

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Cited by:
  1. Bas Jacobs & Ruud A. de Mooij, 2011. "Pigou Meets Mirrlees: On the Irrelevance of Tax Distortions for the Second-Best Pigouvian Tax," CESifo Working Paper Series 3342, CESifo Group Munich.
  2. Patrick Laurency & Dirk Schindler, 2011. "International Climate Agreements, Cost Reductions and Convergence of Partisan Politics," CESifo Working Paper Series 3591, CESifo Group Munich.

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