Working Paper: CEPR ID: DP9982
Authors: Aart J. de Zeeuw; Frederick van der Ploeg
Abstract: The optimal reaction to a pending productivity shock of which the expected arrival time increases with global warming is to accumulate more precautionary capital to smooth consumption and to levy a carbon tax, proportional to the marginal hazard of a catastrophe, to curb the risk of climate change. The carbon tax holds down the stock of greenhouse gases, so that the risk of catastrophe decreases and less precautionary saving is needed. We also allow for conventional marginal climate damages and decompose the optimal carbon tax in two catastrophe components and a conventional Pigouvian component. Further, the productivity catastrophe is compared with recoverable catastrophes and with a catastrophe shock to the temperature response. Finally, the trade-off between adaptation capital and capital used for production is analyzed.
Keywords: adaptation capital; economic growth; non-marginal climate shock; precaution; risk avoidance; social cost of carbon; tipping point
JEL Codes: D81; H20; O40; Q31; Q38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| precautionary saving (D14) | economic stability (E63) |
| higher carbon tax (H23) | stock of greenhouse gases (Q54) |
| stock of greenhouse gases (Q54) | risk of catastrophic outcomes (H12) |
| stock of atmospheric carbon (Q54) | likelihood of productivity catastrophe (D24) |
| investment in adaptation (G31) | negative impacts of climate disasters (Q54) |
| optimal carbon tax (H21) | catastrophic risks and marginal damages (H84) |