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OPTIMAL CARBON PRICING IN GENERAL EQUILIBRIUM: Temperature caps and stranded assets in an extended annual DSGE model

Author

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  • Frederick van der Ploeg
  • Armon Rezai

Abstract

The general equilibrium model developed by Golosov et al. (2014), GHKT for short, is modified to allow for additional negative impacts of global warming on utility and productivity growth, mean reversion in the ratio of climate damages to production, labour-augmenting technical progress, and population growth. We also replace the GHKT assumption of full depreciation of capital each decade by annual logarithmic depreciation. Furthermore, we allow the government to use a lower discount rate than the private sector. We derive a tractable rule for the optimal carbon price for each of these extensions. We then simplify the GHKT model by modelling temperature as cumulative emissions and calibrating it to Burke et al. (2015) damages. Finally, we consider how the rule for the optimal carbon price must be modified to allow for a temperature cap, and what this implies for stranded oil and gas reserves. We illustrate our analytical results with a range of optimal policy simulations.

Suggested Citation

  • Frederick van der Ploeg & Armon Rezai, 2021. "OPTIMAL CARBON PRICING IN GENERAL EQUILIBRIUM: Temperature caps and stranded assets in an extended annual DSGE model," OxCarre Working Papers 227, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    • Handle: RePEc:oxf:oxcrwp:227
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    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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