Climate Tipping and Economic Growth: Precautionary Capital and the Price of Carbon

F. van der Ploeg, Aart de Zeeuw

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

The optimal reaction to a climate tipping point that becomes more imminent with global warming is to be precautionary in adjusting capital to prepare for the calamity and to price carbon to make catastrophic change less imminent. The saving response can be positive or negative. If the mean lag for the impact of the catastrophe is long enough, the saving response will be negative, because the precautionary return in the Keynes–Ramsey rule becomes negative. We also show the separate effects of the elasticity of intertemporal substitution (EIS) and the relative risk aversion (RRA) using Duffie–Epstein preferences. Focusing on a productivity catastrophe, we calibrate our model and show how sensitive the policy responses are to the degrees of EIS and RRA, the trend rate of economic growth, the hazard rate, and how long it takes for the catastrophe to have its full impact.
Original languageEnglish
Pages (from-to)1577–1617
Number of pages41
JournalJournal of the European Economic Association
Volume16
Issue number5
Early online date25 Oct 2017
DOIs
Publication statusPublished - 1 Oct 2018

Fingerprint

Catastrophe
Carbon
Climate
Economic growth
Elasticity of intertemporal substitution
Relative risk aversion
Hazard rate
Carbon price
Policy responses
Productivity
Global warming
Lag

Cite this

@article{d8ee4c55981c46509908cda069364ecf,
title = "Climate Tipping and Economic Growth: Precautionary Capital and the Price of Carbon",
abstract = "The optimal reaction to a climate tipping point that becomes more imminent with global warming is to be precautionary in adjusting capital to prepare for the calamity and to price carbon to make catastrophic change less imminent. The saving response can be positive or negative. If the mean lag for the impact of the catastrophe is long enough, the saving response will be negative, because the precautionary return in the Keynes–Ramsey rule becomes negative. We also show the separate effects of the elasticity of intertemporal substitution (EIS) and the relative risk aversion (RRA) using Duffie–Epstein preferences. Focusing on a productivity catastrophe, we calibrate our model and show how sensitive the policy responses are to the degrees of EIS and RRA, the trend rate of economic growth, the hazard rate, and how long it takes for the catastrophe to have its full impact.",
author = "{van der Ploeg}, F. and {de Zeeuw}, Aart",
year = "2018",
month = "10",
day = "1",
doi = "10.1093/jeea/jvx036",
language = "English",
volume = "16",
pages = "1577–1617",
journal = "Journal of the European Economic Association",
issn = "1542-4766",
publisher = "Wiley-Blackwell",
number = "5",

}

Climate Tipping and Economic Growth: Precautionary Capital and the Price of Carbon. / van der Ploeg, F.; de Zeeuw, Aart.

In: Journal of the European Economic Association, Vol. 16, No. 5, 01.10.2018, p. 1577–1617.

Research output: Contribution to JournalArticleAcademicpeer-review

TY - JOUR

T1 - Climate Tipping and Economic Growth: Precautionary Capital and the Price of Carbon

AU - van der Ploeg, F.

AU - de Zeeuw, Aart

PY - 2018/10/1

Y1 - 2018/10/1

N2 - The optimal reaction to a climate tipping point that becomes more imminent with global warming is to be precautionary in adjusting capital to prepare for the calamity and to price carbon to make catastrophic change less imminent. The saving response can be positive or negative. If the mean lag for the impact of the catastrophe is long enough, the saving response will be negative, because the precautionary return in the Keynes–Ramsey rule becomes negative. We also show the separate effects of the elasticity of intertemporal substitution (EIS) and the relative risk aversion (RRA) using Duffie–Epstein preferences. Focusing on a productivity catastrophe, we calibrate our model and show how sensitive the policy responses are to the degrees of EIS and RRA, the trend rate of economic growth, the hazard rate, and how long it takes for the catastrophe to have its full impact.

AB - The optimal reaction to a climate tipping point that becomes more imminent with global warming is to be precautionary in adjusting capital to prepare for the calamity and to price carbon to make catastrophic change less imminent. The saving response can be positive or negative. If the mean lag for the impact of the catastrophe is long enough, the saving response will be negative, because the precautionary return in the Keynes–Ramsey rule becomes negative. We also show the separate effects of the elasticity of intertemporal substitution (EIS) and the relative risk aversion (RRA) using Duffie–Epstein preferences. Focusing on a productivity catastrophe, we calibrate our model and show how sensitive the policy responses are to the degrees of EIS and RRA, the trend rate of economic growth, the hazard rate, and how long it takes for the catastrophe to have its full impact.

U2 - 10.1093/jeea/jvx036

DO - 10.1093/jeea/jvx036

M3 - Article

VL - 16

SP - 1577

EP - 1617

JO - Journal of the European Economic Association

JF - Journal of the European Economic Association

SN - 1542-4766

IS - 5

ER -