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Robustness of a Simple Rule for the Social Cost of Carbon

  • Armon Rezai
  • Rick Van der Ploeg

The optimal social cost of carbon is in general equilibrium proportional to GDP if utility is logarithmic, production is Cobb-Douglas, depreciation in 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 formula are not robust to more convex climate damages, smaller elasticities of factor substitution and varying 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 well predicted by this framework. Still, in terms of welfare and global warming the simple formula manages to get quite close to the first best.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2014/wp-cesifo-2014-03/cesifo1_wp4703.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4703.

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Date of creation: 2014
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Handle: RePEc:ces:ceswps:_4703
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  1. Hassler, John & Krusell, Per, 2012. "Economics and Climate Change: Integrated Assessment in a Multi-Region World," CEPR Discussion Papers 8771, C.E.P.R. Discussion Papers.
  2. Mikhail Golosov & John Hassler & Per Krusell & Aleh Tsyvinski, 2014. "Optimal Taxes on Fossil Fuel in General Equilibrium," Econometrica, Econometric Society, vol. 82(1), pages 41-88, 01.
  3. 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, pages 1-25.
  4. Rick Van der Ploeg & Armon Rezai, 2013. "Abandoning Fossil Fuel: How fast and how much?," Economics Series Working Papers OxCarre Research Paper 12, University of Oxford, Department of Economics.
  5. Armon Rezai, 2011. "The Opportunity Cost of Climate Policy: A Question of Reference," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113(4), pages 885-903, December.
  6. Brock, William A. & Mirman, Leonard J., 1972. "Optimal economic growth and uncertainty: The discounted case," Journal of Economic Theory, Elsevier, vol. 4(3), pages 479-513, June.
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