Intergenerational inequality aversion, growth and the role of damages: Occam's rule for the global carbon tax

Armon Rezai, Frederick van der Ploeg

Publication: Scientific journalJournal articlepeer-review

Abstract

We derive a simple rule for a nearly optimal carbon tax that can be implemented and tested in a decentralized market economy. Our simple rule depends on the effect of the pure rate of time preference, growth, and intergenerational inequality aversion and basic parameters of the carbon cycle, but also on any adverse effects of global warming on economic growth and mean reversion in climate damages. The performance of the simple rule is excellent and yields only negligible welfare losses compared with the true welfare optimum under a wide range of perturbations including some extreme runs designed to severely road test the rule. Our IAM allows for scarce fossil fuel and endogenous energy transitions and generates cumulative carbon emissions and stranded assets which are also well predicted by our rule.
Original languageEnglish
Pages (from-to)493 - 522
JournalJournal of the Association of Environmental and Resource Economists
Volume3
Issue number2
DOIs
Publication statusPublished - 2016

Austrian Classification of Fields of Science and Technology (ÖFOS)

  • 502042 Environmental economics
  • 502027 Political economy
  • 502046 Economic policy
  • 502047 Economic theory

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