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The Optimal Carbon Tax and Economic Growth: Additive versus multiplicative damages

  • Armon Rezai
  • Frederick van der Ploeg
  • Cees Withagen

In a calibrated integrated assessment model we investigate the differentia impact of additive and multiplicative damages from climate change for both a socially optimal and a business-as-usual scenario in the market economy within the context of a Ramsey model of economic growth. The sources ofenergy are fossil fuel which is available at a cost which rises as reserves diminish and a carbon-free backstop supplied at a decreasing cost. if damages are not proportional to aggregate production output, and the economy is along a development path, the social cost of carbon and the optimal carbon tax are smaller as damages can more easily be compensated for by higher output. As a result, the economy switches later from fossil fuel to the carbon-free backstop and leaves less fossil fuel in situ. This is in contrast to a partial equilibrium analysis with dmages in utility rather than in production which finds that the willingness to forsake current consumption to avoid future global warming is higher (lower) under additive damages in a growing economy if the elasticity of intertemporal substitution is smaller (bigger) than one.

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Paper provided by Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford in its series OxCarre Working Papers with number 093.

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Date of creation: 2012
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Handle: RePEc:oxf:oxcrwp:093
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  1. Acemoglu, Daron & Aghion, Philippe & Bursztyn, Leonardo & Hemous, David, 2011. "The Environment and Directed Technical Change," CEPR Discussion Papers 8660, C.E.P.R. Discussion Papers.
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  3. Karp, Larry & Tsur, Yacov, 2008. "Time perspective and climate change policy," CUDARE Working Paper Series 1062, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  4. Linus Mattauch & Felix Creutzig & Ottmar Edenhofer, 2012. "Avoiding Carbon Lock-In: Policy Options for Advancing Structural Change," Working Papers 1, Department of Climate Change Economics, TU Berlin, revised Feb 2012.
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  8. 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.
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  10. Weitzman, Martin L., 2009. "Additive damages, fat-tailed climate dynamics, and uncertain discounting," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3, pages 1-29.
  11. Rick van der Ploeg & Cees Withagen, 2010. "Is There Really a Green Paradox?," OxCarre Working Papers 035, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  12. Reyer Gerlagh & Matti Liski, 2012. "Carbon Prices for the Next Thousand Years," CESifo Working Paper Series 3855, CESifo Group Munich.
  13. John, A & Pecchenino, R, 1994. "An Overlapping Generations Model of Growth and the Environment," Economic Journal, Royal Economic Society, vol. 104(427), pages 1393-1410, November.
  14. Bretschger, L. & Smulders, J.A., 2007. "Sustainable resource use and economic dynamics," Other publications TiSEM fb7079e5-6c6e-4960-91f8-8, Tilburg University, School of Economics and Management.
  15. Tsur, Yacov & Zemel, Amos, 1996. "Accounting for global warming risks: Resource management under event uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 20(6-7), pages 1289-1305.
  16. Rezai, Armon, 2010. "Recast The Dice And Its Policy Recommendations," Macroeconomic Dynamics, Cambridge University Press, vol. 14(S2), pages 275-289, November.
  17. Armon Rezai & Duncan Foley & Lance Taylor, 2012. "Global warming and economic externalities," Economic Theory, Springer, vol. 49(2), pages 329-351, February.
  18. Stokey, Nancy L, 1998. "Are There Limits to Growth?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 1-31, February.
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