Growth, renewables and the optimal carbon tax

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

Optimal climate policy is investigated in a Ramsey growth model of the global economy with exhaustible oil reserves, an infinitely elastic supply of renewables, stock-dependent oil extraction costs, and convex climate damages. Four regimes can occur, depending on the initial social cost of oil being larger or smaller than that of renewables and depending on the initial oil stock being large or small. We also offer some policy simulations for the first and second regime, which illustrate that with a lower discount rate more oil is left in situ and renewables are phased in more quickly. We identify the conditions under which the optimal carbon tax rises or decreases. Subsidizing renewables (without a carbon tax) induces more oil to be left in situ and a quicker phasing in of renewables, but oil is depleted more rapidly initially. The net effect on global warming is ambiguous. © (2014) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
LanguageEnglish
Pages283-311
JournalInternational Economic Review
Volume55
Issue number1
DOIs
StatePublished - 2014

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Oil
Carbon tax
Economic research
Climate policy
Climate
Global economy
Costs
Discount rate
Growth model
Global warming
Social costs
Policy simulation
Damage
Economics

Cite this

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title = "Growth, renewables and the optimal carbon tax",
abstract = "Optimal climate policy is investigated in a Ramsey growth model of the global economy with exhaustible oil reserves, an infinitely elastic supply of renewables, stock-dependent oil extraction costs, and convex climate damages. Four regimes can occur, depending on the initial social cost of oil being larger or smaller than that of renewables and depending on the initial oil stock being large or small. We also offer some policy simulations for the first and second regime, which illustrate that with a lower discount rate more oil is left in situ and renewables are phased in more quickly. We identify the conditions under which the optimal carbon tax rises or decreases. Subsidizing renewables (without a carbon tax) induces more oil to be left in situ and a quicker phasing in of renewables, but oil is depleted more rapidly initially. The net effect on global warming is ambiguous. {\circledC} (2014) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.",
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Growth, renewables and the optimal carbon tax. / Withagen, C.A.A.M.; van der Ploeg, F.

In: International Economic Review, Vol. 55, No. 1, 2014, p. 283-311.

Research output: Contribution to JournalArticleAcademicpeer-review

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