Working Paper: CEPR ID: DP9921
Authors: Armon Rezai; Frederick van der Ploeg
Abstract: Climate change must deal with two market failures, global warming and learning by doing in renewable use. The social optimum requires an aggressive renewables subsidy in the near term and a gradually rising carbon tax which falls in long run. As a result, more renewables are used relative to fossil fuel, there is an intermediate phase of simultaneous use, the carbonfree era is brought forward, more fossil fuel is locked up and global warming is lower. The optimal carbon tax is not a fixed proportion of world GDP. The climate externality is more severe than the learning by doing one.
Keywords: Additive damages; Carbon tax; Climate change; Directed technical change; Integrated assessment; Learning by doing; Multiplicative damages; Ramsey growth; Renewables subsidy
JEL Codes: H21; Q51; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| appropriately pricing carbon (D40) | curbs fossil fuel use (Q35) |
| appropriately pricing carbon (D40) | promotes substitution towards renewables (Q42) |
| appropriately pricing carbon (D40) | leaves more fossil fuel untapped (Q35) |
| subsidies for renewables (Q42) | facilitates simultaneous use of fossil fuels and renewables (Q35) |
| optimal carbon tax is influenced by climate externalities (H23) | optimal carbon tax is not a fixed proportion of GDP (H21) |
| impact of carbon pricing on fossil fuel consumption (Q31) | temperature increase (Q54) |