Pricing Carbon and Adjusting Capital to Fend Off Climate Catastrophes

Frederick van der Ploeg, Aart de Zeeuw*

*Corresponding author for this work

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.

Original languageEnglish
Pages (from-to)29-50
JournalEnvironmental and Resource Economics
Volume72
Issue number1
DOIs
Publication statusPublished - 2019

Funding

We are grateful to an anonymous reviewer and to John Hassler, Niko Jaakkola, Larry Karp, Per Krusell, Derek Lemoine, Matti Liski, Thomas Lontzek, Antony Millner, Christian Traeger and Sweder van Wijnbergen for helpful comments on an earlier draft and thank Xiaoli He for help with preparing the figures. We also benefited from many comments at presentations in UCL, Amsterdam, Bergen, Berlin, Modena, Oxford, Paris, Stockholm and Tilburg, at the EAERE conference, Toulouse, 2013, at a Beijer Institute workshop, Stockholm, 2014, at the CESifo Conference on Energy and Climate Economics, 2014 at the Royal Economic Society Conference, Manchester, 2015, at the 24th CEPR European Summer Symposium in International Macroeconomics, Tarragona, 2015, and at the NBER’s Summer Institute 2015, Environmental and Energy Economics Workshop. Frederick van der Ploeg is grateful for support from the ERC Advanced Grant ‘Political Economy of Green Paradoxes’ (FP7-IDEAS-ERC Grant No. 269788) and the BP funded OXCARRE. Aart de Zeeuw is grateful for support from the European Commission under the 7th Framework Programme (Socioeconomic Sciences and Humanities - SSH.2013.2.1-1 - Grant Agreement No. 613420). Acknowledgements We are grateful to an anonymous reviewer and to John Hassler, Niko Jaakkola, Larry Karp, Per Krusell, Derek Lemoine, Matti Liski, Thomas Lontzek, Antony Millner, Christian Traeger and Sweder van Wijnbergen for helpful comments on an earlier draft and thank Xiaoli He for help with preparing the figures. We also benefited from many comments at presentations in UCL, Amsterdam, Bergen, Berlin, Modena, Oxford, Paris, Stockholm and Tilburg, at the EAERE conference, Toulouse, 2013, at a Beijer Institute workshop, Stockholm, 2014, at the CESifo Conference on Energy and Climate Economics, 2014 at the Royal Economic Society Conference, Manchester, 2015, at the 24th CEPR European Summer Symposium in International Macroeconomics, Tarragona, 2015, and at the NBER’s Summer Institute 2015, Environmental and Energy Economics Workshop. Frederick van der Ploeg is grateful for support from the ERC Advanced Grant ‘Political Economy of Green Paradoxes’ (FP7-IDEAS-ERC Grant No. 269788) and the BP funded OXCARRE. Aart de Zeeuw is grateful for support from the European Commission under the 7th Framework Programme (Socioeconomic Sciences and Humanities - SSH.2013.2.1-1 - Grant Agreement No. 613420).

FundersFunder number
Socioeconomic Sciences and Humanities
BP
Seventh Framework Programme613420
FP7 Ideas: European Research Council269788
National Bureau of Economic Research
Royal Economic Society
European Commission
European Research Council

    Keywords

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

    Cite this