Working Paper: NBER ID: w26919
Authors: Laurence J. Kotlikoff; Felix Kübler; Andrey Polbin; Simon Scheidegger
Abstract: Anthropogenic climate change produces two conceptually distinct negative economic externalities. The first is an expected path of climate damage. The second, which is this paper's focus, is an expected path of economic risk. To isolate the climate-risk problem, we consider mean-zero, symmetric shocks in our 12-period, overlapping generations model. These shocks impact dirty energy usage (carbon emissions), the relationship between carbon concentration and temperature, and the connection between temperature and damages. Our model exhibits a de minimis climate problem absent its shocks. But due to non-linearities, symmetric shocks deliver negatively skewed impacts, including the potential for climate disasters. As we show, Pareto-improving carbon taxation can dramatically lower climate risk, in general, and disaster risk, in particular. The associated climate-risk tax, which is focused exclusively on limiting climate risk, can be as large or larger than the carbon average-damage tax, which is focused exclusively on limiting average damage.
Keywords: climate change; carbon taxation; economic risk; Pareto efficiency
JEL Codes: F0; F20; H0; H2; H3; J20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| carbon-risk taxation (Q58) | reduction in climate disaster probabilities (Q54) |
| carbon-risk taxation (Q58) | improvement in generational welfare (I39) |
| absence of carbon policy (Q58) | increase in probability of climate disaster over 250 years (Q54) |
| absence of carbon policy (Q58) | increase in probability of climate disaster over 500 years (Q54) |
| optimal carbon-risk taxation (H21) | reduction in climate disaster probabilities (Q54) |
| carbon-risk tax (Q58) | management of carbon risk (Q54) |