The simple arithmetic of carbon pricing and stranded assets

Frederick van der Ploeg, Armon Rezai

Publication: Working/Discussion PaperWU Working Paper

Abstract

A simple rule for the optimal global price of carbon is presented, which captures the geo-physical, economic, and ethical drivers of climate policy as well as the effect of uncertainty about future growth of consumption. There is also a discussion of the optimal carbon budget and the amount of unburnable carbon and stranded fossil fuel reserves and a back-on-the-envelope expression are given for calculating these. It is also shown how one can derive the end of the carbon era and peak warming. This simple arithmetic for determining climate policy is meant to complement the simulations of large-scale integrated assessment model, and to give analytical understanding of the key determinants of climate policy. The simple rules perform very well in a full integrated assessment model. It is also shown how to take account of a 2 °C upper limit on global warming. Steady increases in the efficiency of labour do not affect the optimal price of carbon or the safe carbon budget, but do postpone the carbon-free era.
Original languageEnglish
Place of PublicationVienna
PublisherWU Vienna University of Economics and Business
Publication statusPublished - 1 Sep 2018

Publication series

NameEcological Economic Papers
No.22

WU Working Paper Series

  • Ecological Economic Papers

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