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The social cost of carbon on an optimal balanced growth path

  • Kögel, Tomas

This paper derives analytically the growth rate of the social cost of carbon (SSC) on an optimal balanced growth path. More specifically, the paper examines a deterministic Ramsey model of optimal economic growth with carbon emissions. In this model, restrictions on technology and preferences are imposed that guarantee optimal balanced growth, i.e., that guarantee an optimal path with constant and positive economic growth and a constant stock of carbon in the atmosphere. The paper exploits these restrictions to show that the growth rate of the SCC on the optimal balanced growth path is negative, provided the elasticity of marginal utility of consumption with respect to consumption is larger than or equal to one. There seems to be consensus in the literature that this latter requirement is fulfilled in reality.

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Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2011-35.

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Date of creation: 2011
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Handle: RePEc:zbw:ifwedp:201135
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  1. Frederick van der Ploeg & Cees Withagen, 2010. "Growth and the Optimal Carbon Tax: When to switch from exhaustible resources to renewables?," OxCarre Working Papers 055, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  2. repec:ner:tilbur:urn:nbn:nl:ui:12-153411 is not listed on IDEAS
  3. Hans-Werner Sinn, 2007. "Pareto Optimality in the Extraction of Fossil Fuels and the Greenhouse Effect: A Note," NBER Working Papers 13453, National Bureau of Economic Research, Inc.
  4. Marten, Alex L., 2011. "Transient temperature response modeling in IAMs: the effects of over simplification on the SCC," Economics Discussion Papers 2011-11, Kiel Institute for the World Economy.
  5. Karen Pittel, 2005. "Diskontraten: Endogen oder nicht endogen? Eine umweltrelevante Fragestellung," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 225(4), pages 441-458, July.
  6. Lans Bovenberg, A. & Smulders, Sjak, 1995. "Environmental quality and pollution-augmenting technological change in a two-sector endogenous growth model," Journal of Public Economics, Elsevier, vol. 57(3), pages 369-391, July.
  7. William D. Nordhaus, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 686-702, September.
  8. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  9. Kögel, Tomas, 2009. "On the Relation between Discounting of Climate Change and Edgeworth-Pareto Substitutability," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3, pages 1-12.
  10. Ben Groom & Cameron Hepburn & Phoebe Koundouri & David Pearce, 2005. "Declining Discount Rates: The Long and the Short of it," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(4), pages 445-493, December.
  11. Martin L. Weitzman, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 703-724, September.
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