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 language | English |
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Pages (from-to) | 493 - 522 |
Journal | Journal of the Association of Environmental and Resource Economists |
Volume | 3 |
Issue number | 2 |
DOIs | |
Publication status | Published - 2016 |
Austrian Classification of Fields of Science and Technology (ÖFOS)
- 502042 Environmental economics
- 502027 Political economy
- 502046 Economic policy
- 502047 Economic theory