Discussion paper

DP8215 Growth and the Optimal Carbon Tax: When to Switch from Exhaustible Resources to Renewables?

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.

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Citation

van der Ploeg, F and C Withagen (eds) (2011), “DP8215 Growth and the Optimal Carbon Tax: When to Switch from Exhaustible Resources to Renewables?”, CEPR Press Discussion Paper No. 8215. https://cepr.org/publications/dp8215