Working Paper: CEPR ID: DP8215
Authors: Frederick van der Ploeg; Cees Withagen
Abstract: Optimal climate policy is studied in a Ramsey growth model. A developing economy weighs global warming less, hence is more likely to exhaust fossil fuel and exacerbate global warming. The optimal carbon tax is higher for a developed economy. We analyze the optimal time of transition from fossil fuel to renewables, amount of fossil fuel to leave in situ, and carbon tax. Subsidizing a backstop without an optimal carbon tax induces more fossil fuel to be left in situ and a quicker phasing in of renewables, but fossil fuel is depleted more quickly. Global warming need thus not be alleviated.
Keywords: carbon tax; exhaustible resources; global warming; green paradox; growth; intergenerational inequality aversion; renewables; second best
JEL Codes: D90; E13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| carbon tax (H23) | fossil fuel consumption (Q35) |
| economic development (O29) | carbon tax (H23) |
| fossil fuel consumption (Q35) | timing of switch to renewables (Q42) |
| economic development (O29) | timing of switch to renewables (Q42) |
| social discount rate (H43) | fossil fuel reserves in situ (Q35) |
| subsidies for renewables (Q42) | fossil fuel extraction (L71) |
| carbon tax (H23) | timing of renewable energy adoption (Q42) |
| carbon tax (H23) | fossil fuel depletion rates (Q31) |
| lower price for renewable energy (Q21) | fossil fuel reserves in situ (Q35) |