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Growth and the Optimal Carbon Tax: When to switch from exhaustible resources to renewables?

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  • Frederick van der Ploeg
  • Cees Withagen

Abstract

Optimal climate policy is studied in a Ramsey growth model. A developing economy weighs global warming less, hence is more likely to exhaust fossil fuel and exacerbate global warming. The optimal carbon tax is higher for a developed economy. We analyze the optimal time of transition from fossil fuel to renewables, amount of fossil fuel to leave in situ, and carbon tax. Subsidizing a backstop without an optimal carbon tax induces more fossil fuel to be left in situ and a quicker phasing in of renewables, but fossil fuel is depleted more quickly. Global warming need thus not be alleviated.

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Paper provided by Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford in its series OxCarre Working Papers with number 055.

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Date of creation: 2010
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Handle: RePEc:oxf:oxcrwp:055

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Keywords: carbon tax; renewables; exhaustible resources; global warming; growth; intergenerational inequality aversion; second best; Green Paradox;

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References

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  1. Mikhail Golosov & John Hassler & Per Krusell & Aleh Tsyvinski, 2014. "Optimal Taxes on Fossil Fuel in General Equilibrium," Econometrica, Econometric Society, vol. 82(1), pages 41-88, 01.
  2. Bovenberg, A.L. & Smulders, J.A., 1994. "Transitional impact of environmental policy in an endogenous growth model," Discussion Paper 1994-50, Tilburg University, Center for Economic Research.
  3. Hoel, Michael & Kverndokk, Snorre, 1996. "Depletion of fossil fuels and the impacts of global warming," Resource and Energy Economics, Elsevier, vol. 18(2), pages 115-136, June.
  4. Rick van der Ploeg & Cees Withagen, 2010. "Is There Really a Green Paradox?," OxCarre Working Papers 035, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  5. Ploeg, F. van der & Withagen, C.A.A.M., 1991. "Pollution control and the Ramsey problem," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3107039, Tilburg University.
  6. Acemoglu, Daron & Aghion, Philippe & Bursztyn, Leonardo & Hemous, David, 2011. "The Environment and Directed Technical Change," CEPR Discussion Papers 8660, C.E.P.R. Discussion Papers.
  7. Valentina Bosetti & Carlo Carraro & Romain Duval & Alessandra Sgobbi & Massimo Tavoni, 2009. "The Role of R&D and Technology Diffusion in Climate Change Mitigation: New Perspectives Using the WITCH Model," OECD Economics Department Working Papers 664, OECD Publishing.
  8. Hans-Werner Sinn, 2007. "Public Policies against Global Warming," NBER Working Papers 13454, National Bureau of Economic Research, Inc.
  9. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  10. Withagen, C.A.A.M., 1994. "Pollution and exhaustibility of fossil fuels resource," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3107033, Tilburg University.
  11. Geoffrey Heal, 1976. "The Relationship Between Price and Extraction Cost for a Resource with a Backstop Technology," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 371-378, Autumn.
  12. Sinn, Hans-Werner, . "Das grüne Paradoxon ; Plädoyer für eine illusionsfreie Klimapolitik," Monographs in Economics, University of Munich, Department of Economics, number 19627, April.
  13. Withagen, Cees, 1994. "Pollution and exhaustibility of fossil fuels," Resource and Energy Economics, Elsevier, vol. 16(3), pages 235-242, August.
  14. Tsur, Yacov & Zemel, Amos, 2005. "Scarcity, growth and R&D," Journal of Environmental Economics and Management, Elsevier, vol. 49(3), pages 484-499, May.
  15. R. Quentin Grafton & Tom Kompas & Ngo Van Long, 2010. "Biofuels Subsidies and the Green Paradox," CESifo Working Paper Series 2960, CESifo Group Munich.
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Cited by:
  1. Kögel, Tomas, 2011. "The social cost of carbon on an optimal balanced growth path," Economics Discussion Papers 2011-35, Kiel Institute for the World Economy.
  2. Frederick van der Ploeg & Cees Withagen, 2011. "Too Much Coal, Too Little Oil," OxCarre Working Papers 056, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  3. Haradhan Kumar Mohajan, 2011. "Optimal Environmental Taxes Due to Health Effect," KASBIT Journal of Management & Social Science, Khadim Ali Shah Bukhari Institute of Technology (KASBIT), vol. 4, pages 1-19, December.

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