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Growth, Renewables and the Optimal Carbon Tax

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  • Rick Van der Ploeg
  • Cees Withagen

Abstract

Optimal climate policy is investigated in a Ramsey growth model of the global economy with exhaustible oil reserves, an infinitely elastic supply of renewables, stock-dependent oil extraction costs and convex climate damages. Four regimes can occur. If the initial social cost of oil is less than that of renewables, there are two regimes starting with oil. The first one occurs if the oil stock is not too small and not too large and the initial capital stock is below its steady state in which case it is optimal to follow the oil-only phase with a renewables-only phase. The second regime occurs if the initial oil stock is large enough. It is then optimal to follow an oil-only phase with an oil-renewables phase. If it is optimal to start with renewables, a third and fourth regime emerge. The third one occurs if the initial oil stock takes on an intermediate value and the capital stock exceeds its steady-state value. It is then optimal to start with renewables and end with a phase where oil is used alongside renewables. The fourth regime occurs if the initial oil stock is low enough. Renewables are then used throughout. We also offer some policy simulations for the first and second regime, which illustrate that with a lower discount rate more oil is left in situ and renewables are phased in more quickly. In the first regime the optimal carbon tax rises during the oil-only phase, but in the second regime the optimal carbon tax can fall. Subsidizing renewables (without a carbon tax) induces more oil to be left in situ and a quicker phasing in of renewables, but oil is depleted more rapidly initially. The net effect on global warming is ambiguous.

Suggested Citation

  • Rick Van der Ploeg & Cees Withagen, 2010. "Growth, Renewables and the Optimal Carbon Tax," OxCarre Working Papers 055, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  • Handle: RePEc:oxf:oxcrwp:055
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    3. Helm, Carsten & Mier, Mathias, 2021. "Steering the energy transition in a world of intermittent electricity supply: Optimal subsidies and taxes for renewables and storage," Journal of Environmental Economics and Management, Elsevier, vol. 109(C).
    4. Kögel, Tomas, 2011. "The social cost of carbon on an optimal balanced growth path," Economics Discussion Papers 2011-35, Kiel Institute for the World Economy (IfW).
    5. Willi Semmler & Giovanni Di Bartolomeo & Behnaz Minooei Fard & Joao Paulo Braga, 2021. "Limit Pricing and Entry Game of Renewable Energy Firms into the Energy Sector," Working Papers 200, University of Rome La Sapienza, Department of Public Economics.
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    More about this item

    Keywords

    Green Ramsey model; carbon tax; renewables; exhaustible resources; global warming; development; growth; intergereational inequality aversion; second best; Green Paradox;
    All these keywords.

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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