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Optimal Carbon Taxes with Non-Constant Time Preference

  • Iverson, Terrence
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    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.

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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43264.

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    Date of creation: 13 Dec 2012
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    Handle: RePEc:pra:mprapa:43264
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    1. Mikhail Golosov & John Hassler & Per Krusell & Aleh Tsyvinski, 2014. "Optimal Taxes on Fossil Fuel in General Equilibrium," Econometrica, Econometric Society, vol. 82(1), pages 41-88, 01.
    2. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, June.
    3. Goldman, Steven M, 1980. "Consistent Plans," Review of Economic Studies, Wiley Blackwell, vol. 47(3), pages 533-37, April.
    4. Karp, Larry, 2007. "Non-constant discounting in continuous time," Journal of Economic Theory, Elsevier, vol. 132(1), pages 557-568, January.
    5. Robert J. Barro, 1999. "Ramsey Meets Laibson In The Neoclassical Growth Model," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1125-1152, November.
    6. Karp, Larry & Tsur, Yacov, 2008. "Time perspective and climate change policy," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt04k4b21g, Department of Agricultural & Resource Economics, UC Berkeley.
    7. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
    8. Reyer Gerlagh, 2012. "Carbon Prices for the Next Thousand Years," Review of Environment, Energy and Economics - Re3, Fondazione Eni Enrico Mattei, August.
    9. Christian Gollier & Richard Zeckhauser, 2005. "Aggregation of Heterogeneous Time Preferences," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 878-896, August.
    10. Cropper, Maureen L & Aydede, Sema K & Portney, Paul R, 1994. "Preferences for Life Saving Programs: How the Public Discounts Time and Age," Journal of Risk and Uncertainty, Springer, vol. 8(3), pages 243-65, May.
    11. Karp, Larry S, 2004. "Global warming and hyperbolic discounting," CUDARE Working Paper Series 0934R, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
    12. William D. Nordhaus, 2011. "The Economics of Tail Events with an Application to Climate Change," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 5(2), pages 240-257, Summer.
    13. Fujii, Tomoki & Karp, Larry, 2008. "Numerical analysis of non-constant pure rate of time preference: A model of climate policy," Journal of Environmental Economics and Management, Elsevier, vol. 56(1), pages 83-101, July.
    14. Heal, Geoffrey, 2005. "Intertemporal Welfare Economics and the Environment," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 3, chapter 21, pages 1105-1145 Elsevier.
    15. Loewenstein, George, 1987. "Anticipation and the Valuation of Delayed Consumption," Economic Journal, Royal Economic Society, vol. 97(387), pages 666-84, September.
    16. Brock, William A. & Mirman, Leonard J., 1972. "Optimal economic growth and uncertainty: The discounted case," Journal of Economic Theory, Elsevier, vol. 4(3), pages 479-513, June.
    17. Azfar, Omar, 1999. "Rationalizing hyperbolic discounting," Journal of Economic Behavior & Organization, Elsevier, vol. 38(2), pages 245-252, February.
    18. Fishburn, Peter C & Rubinstein, Ariel, 1982. "Time Preference," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(3), pages 677-94, October.
    19. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
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