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Robustness of a simple rule for the social cost of carbon

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  • Rezai, Armon
  • van der Ploeg, Frederick

Abstract

The optimal social cost of carbon is in general equilibrium proportional to GDP if utility is logarithmic, production is Cobb–Douglas, depreciation is 100% every period, climate damages as fraction of production decline exponentially with the stock of atmospheric carbon, and fossil fuel extraction does not require capital. The time profile and size of the optimal carbon tax corresponding to this simple rule are not robust to more convex climate damages, smaller elasticities of factor substitution and non-unitary coefficients of relative intergenerational inequality aversion. The optimal timing of energy transitions and the amount of fossil fuel reserves to be locked up in the earth are also not accurately predicted by this framework. Still, in terms of welfare and global warming the simple rule for the optimal social cost of carbon manages to get quite close to the first best.

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  • Rezai, Armon & van der Ploeg, Frederick, 2015. "Robustness of a simple rule for the social cost of carbon," Economics Letters, Elsevier, vol. 132(C), pages 48-55.
    • Handle: RePEc:eee:ecolet:v:132:y:2015:i:c:p:48-55
    DOI: 10.1016/j.econlet.2015.04.007
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    Cited by:

    1. Richard S. J. Tol, 2024. "Database for the meta-analysis of the social cost of carbon (v2024.0)," Papers 2402.09125, arXiv.org.
    2. Richard S J Tol, 2018. "The Economic Impacts of Climate Change," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 12(1), pages 4-25.
    3. Anna Creti & Alena Kotelnikova & Guy Meunier & Jean-Pierre Ponssard, 2018. "Defining the Abatement Cost in Presence of Learning-by-Doing: Application to the Fuel Cell Electric Vehicle," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 71(3), pages 777-800, November.
    4. Hillebrand, Elmar & Hillebrand, Marten, 2023. "Who pays the bill? Climate change, taxes, and transfers in a multi-region growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 153(C).
    5. Gerlagh, Reyer & Jaimes, Richard & Motavasseli, Ali, 2017. "Global Demographic Change and Climate Policies," Discussion Paper 2017-035, Tilburg University, Center for Economic Research.
    6. Hillebrand, Elmar & Hillebrand, Marten, 2019. "Optimal climate policies in a dynamic multi-country equilibrium model," Journal of Economic Theory, Elsevier, vol. 179(C), pages 200-239.
    7. van der Ploeg, Frederick & Rezai, Armon, 2021. "Optimal carbon pricing in general equilibrium: Temperature caps and stranded assets in an extended annual DSGE model," Journal of Environmental Economics and Management, Elsevier, vol. 110(C).
    8. Armon Rezai & Frederick Van der Ploeg, 2016. "Intergenerational Inequality Aversion, Growth, and the Role of Damages: Occam's Rule for the Global Carbon Tax," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 3(2), pages 493-522.
    9. Schultes, Anselm & Piontek, Franziska & Soergel, Bjoern & Rogelj, Joeri & Baumstark, Lavinia & Kriegler, Elmar & Edenhofer, Ottmar & Luderer, Gunnar, 2020. "Economic damages from on-going climate change imply deeper near-term emission cuts," MPRA Paper 103655, University Library of Munich, Germany.
    10. Terrence Iverson & Scott Denning & Sammy Zahran, 2015. "When the long run matters," Climatic Change, Springer, vol. 129(1), pages 57-72, March.
    11. Jaimes, Richard, 2023. "Does idiosyncratic risk matter for climate policy?," Environment and Development Economics, Cambridge University Press, vol. 28(4), pages 353-367, August.
    12. Richard S.J. Tol, 2021. "Estimates of the social cost of carbon have not changed over time," Working Paper Series 0821, Department of Economics, University of Sussex Business School.
    13. Gustav Engström & Johan Gars, 2016. "Climatic Tipping Points and Optimal Fossil-Fuel Use," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 65(3), pages 541-571, November.
    14. Anthony Wiskich, 2024. "Social Costs of Methane and Carbon Dioxide in a Tipping Climate," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 87(5), pages 1275-1293, May.
    15. Hassler, J. & Krusell, P. & Smith, A.A., 2016. "Environmental Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1893-2008, Elsevier.
    16. Rick Van der Ploeg & Armon Rezai, 2015. "Intergenerational Inequality Aversion, Growth and the Role of Damages: Occam's rule for the global tax," Economics Series Working Papers OxCarre Research Paper 15, University of Oxford, Department of Economics.
    17. Richard S. J. Tol, 2021. "Estimates of the social cost of carbon have increased over time," Papers 2105.03656, arXiv.org, revised Aug 2022.
    18. Armon Rezai & Frederick Van der Ploeg, 2016. "Intergenerational Inequality Aversion, Growth, and the Role of Damages: Occam's Rule for the Global Carbon Tax," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 3(2), pages 493-522.

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    More about this item

    Keywords

    Social cost of carbon; Ramsey growth; Climate damages; Energy transitions; Stranded fossil fuel assets; Robustness;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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