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Climate Tipping and Economic Growth: Precautionary Capital and the Price of Carbon

  • Frederick van der Ploeg
  • Aart de Zeeuw

The optimal reaction to a productivity shock which becomes more imminent with global warming is to price carbon (proportional to the marginal hazard of a catastrophe) to curb the risk of climate change, but also to accumulate precautionary capital to facilitate smoothing of consumption and curb the adverse effects of the calamity on the economy. We allow for conventional marginal climate damages as well and decompose the optimal carbon price in two catastrophe components and a conventional component. Moreover, the producivity catastrophe is compared with recoverable catastrophes and with a shock to the temperature response.

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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 118.

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Date of creation: 2013
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Handle: RePEc:oxf:oxcrwp:118
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  1. BENCHEKROUN, Hassan & GAUDET, Gérard & LONG, Ngo Van, 2004. "Temporary Natural Resource Cartels," Cahiers de recherche 03-2004, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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  5. Eric Nævdal, 2003. "Dynamic Optimisation in the Presence of Threshold Effects when the Location of the Threshold is Uncertain With an Application to a Possible Disintegration of the Western Antarctic Ice Sheet," Working Papers 143, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
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  7. Polasky, Stephen & de Zeeuw, Aart & Wagener, Florian, 2011. "Optimal management with potential regime shifts," Journal of Environmental Economics and Management, Elsevier, vol. 62(2), pages 229-240, September.
  8. 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.
  9. Derek Lemoine & Christian Traeger, 2014. "Watch Your Step: Optimal Policy in a Tipping Climate," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 137-66, February.
  10. Martin L. Weitzman, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 703-724, September.
  11. Aart de Zeeuw & Amos Zemel, 2012. "Regime Shifts and Uncertainty in Pollution Control," CESifo Working Paper Series 3697, CESifo Group Munich.
  12. Long, Ngo Van, 1975. "Resource extraction under the uncertainty about possible nationalization," Journal of Economic Theory, Elsevier, vol. 10(1), pages 42-53, February.
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