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Steering the Climate System: Using Inertia to Lower the Cost of Policy

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  • Derek Lemoine
  • Ivan Rudik

Abstract

Common views hold that the efficient way to limit warming to a chosen level is to price carbon emissions at a rate that increases exponentially. We show that this Hotelling tax on carbon emissions is actually inefficient. The least-cost policy path takes advantage of the climate system's inertia to delay reducing emissions and allow greater cumulative emissions. The efficient carbon tax follows an inverse-U-shaped path and grows more slowly than the Hotelling tax. Economic models that assume exponentially increasing carbon taxes are overestimating the cost of limiting warming, overestimating the efficient near-term carbon tax, and overvaluing technologies that mature sooner.

Suggested Citation

  • Derek Lemoine & Ivan Rudik, 2017. "Steering the Climate System: Using Inertia to Lower the Cost of Policy," American Economic Review, American Economic Association, vol. 107(10), pages 2947-2957, October.
  • Handle: RePEc:aea:aecrev:v:107:y:2017:i:10:p:2947-57
    Note: DOI: 10.1257/aer.20150986
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    More about this item

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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