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Optimal Carbon Taxes with Non-Constant Time Preference

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  • Iverson, Terrence

Abstract

The paper derives an explicit formula for the near-term carbon price in a dynamic stochastic general equilibrium climate model in which agents employ arbitrary non-constant time preference rates. The paper uses a simplified version of the model in Golosov et al. (2011), though we argue that the added assumptions are unlikely to matter for our conclusions. The formula is derived first under the assumption that the initial decision-maker has a commitment device, then solving for the unique subgame perfect equilibrium. Somewhat remarkably, the near-term carbon price is the same in both cases. We further show that the near-term carbon price remains unchanged for all potential beliefs about the time preference structure of future generations. It follows that concerns about time inconsistency can be safely ignored when applying the derived formula. The carbon price is the same as the Pigouvian tax in the equilibrium with commitment, and it is bigger than the Pigouvian tax in the equilibrium without commitment provided damages are sufficiently persistent. The formula reduces to the carbon price formula in Golosov et al. (2011) when discounting is constant, and it reduces to the carbon price formula in Gerlagh and Liski (2012) when discounting is quasi-hyperbolic.

Suggested Citation

  • Iverson, Terrence, 2012. "Optimal Carbon Taxes with Non-Constant Time Preference," MPRA Paper 43264, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:43264
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Hiroaki Sakamoto & Masako Ikefuji & Jan R. Magnus, 2017. "Adaptation for mitigation," Discussion papers e-16-014, Graduate School of Economics , Kyoto University.
    2. Rezai, Armon & van der Ploeg, Frederick, 2015. "Robustness of a simple rule for the social cost of carbon," Economics Letters, Elsevier, vol. 132(C), pages 48-55.
    3. Gerlagh, Reyer & Jaimes, Richard & Motavasseli, Ali, 2017. "Global demographic change and climate policies," Discussion Paper 2017-035, Tilburg University, Center for Economic Research.
    4. Christian Traeger, 2015. "Closed-Form Integrated Assessment and Uncertainty," CESifo Working Paper Series 5464, CESifo Group Munich.
    5. Armon Rezai & Frederick Van der Ploeg, 2016. "Intergenerational Inequality Aversion, Growth, and the Role of Damages: Occam's Rule for the Global Carbon Tax," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 3(2), pages 493-522.
    6. Frederick Van der Ploeg & Armon Rezai, 2016. "Stranded Assets, the Social Cost of Carbon, and Directed Technical Change: Macroeconomic Dynamics of Optimal Climate Policy," CESifo Working Paper Series 5787, CESifo Group Munich.
    7. Terrence Iverson & Scott Denning & Sammy Zahran, 2015. "When the long run matters," Climatic Change, Springer, vol. 129(1), pages 57-72, March.
    8. Reyer Gerlagh & Thomas Michielsen, 2015. "Moving targets—cost-effective climate policy under scientific uncertainty," Climatic Change, Springer, vol. 132(4), pages 519-529, October.
    9. repec:eee:eecrev:v:96:y:2017:i:c:p:1-17 is not listed on IDEAS
    10. Iverson , Terrence & Karp, Larry, 2017. "Carbon taxes and climate commitment with non-constant time preference," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt3hw6s14v, Department of Agricultural & Resource Economics, UC Berkeley.

    More about this item

    Keywords

    hyperbolic discounting; time inconsistency; optimal carbon price;

    JEL classification:

    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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