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Untapped Fossil Fuel and the Green Paradox: A classroom calibration of the optimal carbon tax

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  • Rick Van der Ploeg

Abstract

A classroom model of global warming, fossil fuel depletion and the optimal carbon tax is formulated and calibrated. It features iso-elastic fossil fuel demand, stock-dependent fossil fuel extraction costs, an exogenous interest rate and no decay of the atmospheric stock of carbon. The optimal carbon tax reduces emissions from burning fossil fuel, both in the short and medium run. Furthermore, it brings forward the date that renewables take over from fossil fuel and encourages the market to keep more fossil fuel locked up. A renewables subsidy induces faster fossil fuel extraction and thus accelerates global warming during the fossil fuel phase, but brings forward the carbon-free era, locks up more fossil fuel reserves and thus ultimately curbs cumulative carbon emissions and global warming. For relatively large subsidies social welfare is more likely to fall as the economic costs rises more than proportionally with the size of the subsidy. Our calibration suggests that such subsidies are not a good second-best climate policy.

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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 119.

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Date of creation: 25 Jul 2013
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Handle: RePEc:oxf:wpaper:oxcarre-research-paper-119

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Keywords: global warming; social cost of carbon; optimal cabon tax; renewables;

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  1. Weitzman, Martin L., 2012. "GHG Targets as Insurance Against Catastrophic Climate Damages," Scholarly Articles 11315435, Harvard University Department of Economics.
  2. Ackerman, Frank & Stanton, Elizabeth A., 2012. "Climate risks and carbon prices: Revising the social cost of carbon," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 6(10), pages 1-25.
  3. Sinn, Hans-Werner, 2008. "Public policies against global warming: A supply side approach," Munich Reprints in Economics 19638, University of Munich, Department of Economics.
  4. van der Ploeg, Frederick & Withagen, Cees, 2012. "Is there really a green paradox?," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 342-363.
  5. Martin L. Weitzman, 2010. "GHG Targets as Insurance Against Catastrophic Climate Damages," NBER Working Papers 16136, National Bureau of Economic Research, Inc.
  6. Armon Rezai & Duncan Foley & Lance Taylor, 2012. "Global warming and economic externalities," Economic Theory, Springer, vol. 49(2), pages 329-351, February.
  7. Daron Acemoglu & Philippe Aghion & Leonardo Bursztyn & David Hemous, 2012. "The Environment and Directed Technical Change," American Economic Review, American Economic Association, vol. 102(1), pages 131-66, February.
  8. Liski, Matti & Tahvonen, Olli, 2004. "Can carbon tax eat OPEC's rents?," Journal of Environmental Economics and Management, Elsevier, vol. 47(1), pages 1-12, January.
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