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Climate Policy and Catastrophic Change: Be Prepared and Avert Risk

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  • Rick Van der Ploeg
  • Aart de Zeeuw

Abstract

The optimal reaction to a pending climate catastrophe is to accumulate capital to be better prepared for the disaster and levy a carbon tax to reduce the risk of the hazard by curbing global warming. The optimal carbon tax consists of the present value of marginal damages, the non-marginal expected change in welfare caused by a marginal higher risk of catastrophe, and the expected loss in after-catastrophe welfare. The last two terms offset precautionary capital accumulation. A linear hazard function calibrated to an expected time of 15 years for a 32% drop in global GDP if temperature stays at 6 degrees Celsius implies with a discount rate of 1.4% a precautionary return of 1.6% and a carbon tax of 136 US $/tC. More intertemporal substitution lowers precautionary capital accumulation and lessens the need for a high carbon tax, but implies less intergenerational inequality aversion which pushes up the carbon tax.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number OxCarre Research Paper 118.

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Date of creation: 24 Jul 2013
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Handle: RePEc:oxf:wpaper:oxcarre-research-paper-118

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Keywords: non-marginal climate policy; tipping points; risk avoidance; economic growth; social cost of carbon; precaution; adaptation capital;

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Cited by:
  1. van der Ploeg, Frederick, 2014. "Abrupt positive feedback and the social cost of carbon," European Economic Review, Elsevier, vol. 67(C), pages 28-41.

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