DP15968 ACE - Analytic Climate Economy

Author(s): Christian Traeger
Publication Date: March 2021
Keyword(s): capital persistence, carbon cycle, carbon tax, climate change, climate sensitivity, Integrated assessment, population weighting, Social cost of carbon, technological progress, Temperature
JEL(s): D61, D80, E13, H23, H43, Q54
Programme Areas: Occasional Paper
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15968

The paper discusses optimal carbon taxation in an analytic quantitative integrated assessment model (IAM). The model links IAM components and parametric assumptions directly to their policy impacts. The paper discusses the distinct tax impact of carbon versus temperature dynamics and uses the see-through model to illustrate various aspects of IAM calibrations including the differentiation between consumption and investments goods. Novel to analytic IAMs are the explicit temperature dynamics, a general economy, energy sectors including capital, various degrees of substitutability across energy sources, an approximation of capital persistence, and objective functions that include CES preferences and population weighting. ACE opens the door to tractable forward-looking stochastic modeling and dynamic strategic interactions in complex IAMs, explored in accompanying work.