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Intergenerational Inequality Aversion, Growth and the Role of Damages; Occam's rule for the global carbon tax

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  • Armon Rezai
  • Frederick van der Ploeg

Abstract

We use the Euler equation to put forward a back-on-the-envelope rule for the global carbon tax based on a two-box carbon cycle with temperature lag, and a constant elasticity of marginal damages with respect to GDP. This tax falls with time impatience and intergenerational inequality aversion and rises with population growth and prudence. It also falls with growth in living standards if inequality aversion is large enough or marginal damages do not react much too GDP. It rises in proportion with GDP if marginal climate damages are proportional to output and has a flat time profile if they are additive. The rule also allows for mean reversion in climate damages. The rule closely approximates the true optimum for our IAM of Ramsey growth, scarce fossil fuel, energy transitions and stranded assets despite it using the more complicated DICE carbon cycle and temperature modules. The simple rule gets close to the social optimum even if damages are much more convex than in DICE.

Suggested Citation

  • Armon Rezai & Frederick van der Ploeg, 2015. "Intergenerational Inequality Aversion, Growth and the Role of Damages; Occam's rule for the global carbon tax," OxCarre Working Papers 150, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  • Handle: RePEc:oxf:oxcrwp:150
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    Cited by:

    1. van der Ploeg, Frederick & Rezai, Armon, 2017. "Cumulative emissions, unburnable fossil fuel, and the optimal carbon tax," Technological Forecasting and Social Change, Elsevier, vol. 116(C), pages 216-222.
    2. Drupp, Moritz A. & Hänsel, Martin C., 2018. "Relative prices and climate policy: How the scarcity of non-market goods drives policy evaluation," Economics Working Papers 2018-01, Christian-Albrechts-University of Kiel, Department of Economics.
    3. Niko Jaakkola & Frederick van der Ploeg, 2017. "Non-Cooperative and Cooperative Climate Policies with Anticipated Breakthrough Technology," OxCarre Working Papers 190, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    4. repec:eee:eneeco:v:68:y:2017:i:s1:p:4-16 is not listed on IDEAS
    5. repec:spr:climat:v:147:y:2018:i:1:d:10.1007_s10584-017-2132-8 is not listed on IDEAS
    6. Anna Grodecka & Karlygash Kuralbayeva, 2014. "The Price vs Quantity Debate: Climate policy and the role of business cycles," OxCarre Working Papers 137, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    7. van den Bijgaart, Inge & Gerlagh, Reyer & Liski, Matti, 2016. "A simple formula for the social cost of carbon," Journal of Environmental Economics and Management, Elsevier, vol. 77(C), pages 75-94.
    8. Armon Rezai & Frederick Ploeg, 2017. "Second-Best Renewable Subsidies to De-carbonize the Economy: Commitment and the Green Paradox," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 66(3), pages 409-434, March.
    9. Frederick Ploeg, 2018. "The safe carbon budget," Climatic Change, Springer, vol. 147(1), pages 47-59, March.
    10. Frederick van der Ploeg, 2017. "The Safe Carbon Budget," OxCarre Working Papers 195, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    11. Rezai, Armon & van der Ploeg, Frederick, 2017. "Climate policies under climate model uncertainty: Max-min and min-max regret," Energy Economics, Elsevier, vol. 68(S1), pages 4-16.
    12. Rick van der Ploeg, 2017. "Race to Burn the Last Ton of Carbon and the Risk of Stranded Assets," CESifo Working Paper Series 6793, CESifo Group Munich.
    13. van den Bijgaart, Inge, 2016. "Essays in environmental economics and policy," Other publications TiSEM 298bee2a-cb08-4173-9fe1-8, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    simple rule; SCC; Ramsey growth; optimal energy transitions; stranded assets; intergenerational inequality aversion; climate damage specification;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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