Climate Policy and Catastrophic Change: Be Prepared and Avert Risk
AbstractThe 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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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number OxCarre Research Paper 118.
Date of creation: 24 Jul 2013
Date of revision:
non-marginal climate policy; tipping points; risk avoidance; economic growth; social cost of carbon; precaution; adaptation capital;
Other versions of this item:
- Frederick van der Ploeg & Aart de Zeeuw, 2013. "Climate Policy and Catastrophic Change: Be Prepared and Avert Risk," OxCarre Working Papers 118, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
- Frederick van der Ploeg & Aart de Zeeuw, 2013. "CLIMATE POLICY AND CATASTROPHIC CHANGE: Be Prepared and Avert Risk," CEEES Paper Series CE3S-02/13, European University at St. Petersburg, Department of Economics.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
- Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
- Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-12-15 (All new papers)
- NEP-ENE-2013-12-15 (Energy Economics)
- NEP-ENV-2013-12-15 (Environmental Economics)
- NEP-RES-2013-12-15 (Resource Economics)
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