Pricing Carbon and Adjusting Capital to Fend Off Climate Catastrophes

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

The optimal reaction to a potential productivity shock as a consequence of climate tipping is to substantially tax carbon in order to curb the risk of tipping, but to adjust capital as well in order to smooth consumption when tipping occurs. We also allow for conventional marginal climate damages and decompose the optimal carbon tax in two catastrophe components and the conventional component. We distinguish constant and increasing marginal hazards. Moreover, the productivity catastrophe is compared with recoverable catastrophes and with a shock to the climate sensitivity. Finally, we allow for investments in adaptation capital as an alternative to counter the potential adverse effects of climate tipping. Quantitatively, the results are investigated with a calibrated model for the world economy.

LanguageEnglish
Pages1-22
Number of pages22
JournalEnvironmental and Resource Economics
DOIs
StateAccepted/In press - 2019

Fingerprint

Taxation
Productivity
Curbs
pollution tax
Carbon
carbon
climate
Costs
Hazards
productivity
hazard
damage
catastrophe
Catastrophe
Climate
Pricing
Carbon tax

Keywords

  • Climate tipping point
  • Economic growth
  • Precautionary capital
  • Risk
  • Social cost of carbon

Cite this

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title = "Pricing Carbon and Adjusting Capital to Fend Off Climate Catastrophes",
abstract = "The optimal reaction to a potential productivity shock as a consequence of climate tipping is to substantially tax carbon in order to curb the risk of tipping, but to adjust capital as well in order to smooth consumption when tipping occurs. We also allow for conventional marginal climate damages and decompose the optimal carbon tax in two catastrophe components and the conventional component. We distinguish constant and increasing marginal hazards. Moreover, the productivity catastrophe is compared with recoverable catastrophes and with a shock to the climate sensitivity. Finally, we allow for investments in adaptation capital as an alternative to counter the potential adverse effects of climate tipping. Quantitatively, the results are investigated with a calibrated model for the world economy.",
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Pricing Carbon and Adjusting Capital to Fend Off Climate Catastrophes. / van der Ploeg, Frederick; de Zeeuw, Aart.

In: Environmental and Resource Economics, 2019, p. 1-22.

Research output: Contribution to JournalArticleAcademicpeer-review

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