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Growth and the Optimal Carbon Tax: When to Switch from Exhaustible Resources to Renewables?

  • van der Ploeg, Frederick
  • Withagen, Cees

Optimal climate policy is studied in a Ramsey growth model. A developing economy weighs global warming less, hence is more likely to exhaust fossil fuel and exacerbate global warming. The optimal carbon tax is higher for a developed economy. We analyze the optimal time of transition from fossil fuel to renewables, amount of fossil fuel to leave in situ, and carbon tax. Subsidizing a backstop without an optimal carbon tax induces more fossil fuel to be left in situ and a quicker phasing in of renewables, but fossil fuel is depleted more quickly. Global warming need thus not be alleviated.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8215.

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Date of creation: Jan 2011
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Handle: RePEc:cpr:ceprdp:8215
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  1. Sinn, Hans-Werner, . "Das grüne Paradoxon ; Plädoyer für eine illusionsfreie Klimapolitik," Monographs in Economics, University of Munich, Department of Economics, number 19627, December.
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  12. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
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  16. Hans-Werner Sinn, 2007. "Public Policies against Global Warming," CESifo Working Paper Series 2087, CESifo Group Munich.
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