TY - JOUR

T1 - Robustness of a simple rule for the social cost of carbon

AU - Rezai, Armon

AU - van der Ploeg, Frederick

PY - 2015

Y1 - 2015

N2 - The optimal social cost of carbon is in general equilibrium proportional to GDP if utility is logarithmic, production is CobbDouglas, depreciation is 100% every period, climate damages as fraction of production decline exponentially with the stock of atmospheric carbon, and fossil fuel extraction does not require capital. The time profile and size of the optimal carbon tax corresponding to this simple rule are not robust to more convex climate damages, smaller elasticities of factor substitution and non-unitary coefficients of relative intergenerational inequality aversion. The optimal timing of energy transitions and the amount of fossil fuel reserves to be locked up in the earth are also not accurately predicted by this framework. Still, in terms of welfare and global warming the simple rule for the optimal social cost of carbon manages to get quite close to the first best.

AB - The optimal social cost of carbon is in general equilibrium proportional to GDP if utility is logarithmic, production is CobbDouglas, depreciation is 100% every period, climate damages as fraction of production decline exponentially with the stock of atmospheric carbon, and fossil fuel extraction does not require capital. The time profile and size of the optimal carbon tax corresponding to this simple rule are not robust to more convex climate damages, smaller elasticities of factor substitution and non-unitary coefficients of relative intergenerational inequality aversion. The optimal timing of energy transitions and the amount of fossil fuel reserves to be locked up in the earth are also not accurately predicted by this framework. Still, in terms of welfare and global warming the simple rule for the optimal social cost of carbon manages to get quite close to the first best.

UR - http://www.oxcarre.ox.ac.uk/images/stories/papers/PolicyPapers/oxcarrepp201526.pdf

U2 - 10.1016/j.econlet.2015.04.007

DO - 10.1016/j.econlet.2015.04.007

M3 - Journal article

SN - 0165-1765

VL - 132

SP - 48

EP - 55

JO - Economics Letters

JF - Economics Letters

ER -