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