Pricing carbon and adjusting capital to fend off climate catastrophes

F. van der Ploeg, Aart de Zeeuw

    Research output: Contribution to journalArticleScientificpeer-review

    Abstract

    The optimal reaction to a potential productivity shock as a consequence of climate tipping is to substantially tax carbon in order to curb the risk of tipping, but to adjust capital as well in order to smooth consumption when tipping occurs. We also allow for conventional marginal climate damages and decompose the optimal carbon tax in two catastrophe components and the conventional component. We distinguish constant and increasing marginal hazards. Moreover, the productivity catastrophe is compared with recoverable catastrophes and with a shock to the climate sensitivity. Finally, we allow for investments in adaptation capital as an alternative to counter the potential adverse effects of climate tipping. Quantitatively, the results are investigated with a calibrated model for the world economy.
    Original languageEnglish
    Pages (from-to)29-50
    JournalEnvironmental and Resource Economics
    Volume72
    Issue number1
    DOIs
    Publication statusPublished - Jan 2019

    Fingerprint

    pollution tax
    carbon
    climate
    productivity
    hazard
    damage
    catastrophe
    Climate
    Carbon
    Pricing
    Catastrophe
    Carbon tax
    consumption
    economy
    effect
    world
    Productivity
    Damage
    Hazard
    Productivity shocks

    Keywords

    • climate tipping point
    • risk
    • social cost of carbon
    • precautionary capital
    • economic growth

    Cite this

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    title = "Pricing carbon and adjusting capital to fend off climate catastrophes",
    abstract = "The optimal reaction to a potential productivity shock as a consequence of climate tipping is to substantially tax carbon in order to curb the risk of tipping, but to adjust capital as well in order to smooth consumption when tipping occurs. We also allow for conventional marginal climate damages and decompose the optimal carbon tax in two catastrophe components and the conventional component. We distinguish constant and increasing marginal hazards. Moreover, the productivity catastrophe is compared with recoverable catastrophes and with a shock to the climate sensitivity. Finally, we allow for investments in adaptation capital as an alternative to counter the potential adverse effects of climate tipping. Quantitatively, the results are investigated with a calibrated model for the world economy.",
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    author = "{van der Ploeg}, F. and {de Zeeuw}, Aart",
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    doi = "10.1007/s10640-018-0231-2",
    language = "English",
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    Pricing carbon and adjusting capital to fend off climate catastrophes. / van der Ploeg, F.; de Zeeuw, Aart.

    In: Environmental and Resource Economics, Vol. 72, No. 1, 01.2019, p. 29-50.

    Research output: Contribution to journalArticleScientificpeer-review

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    AU - de Zeeuw, Aart

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    N2 - The optimal reaction to a potential productivity shock as a consequence of climate tipping is to substantially tax carbon in order to curb the risk of tipping, but to adjust capital as well in order to smooth consumption when tipping occurs. We also allow for conventional marginal climate damages and decompose the optimal carbon tax in two catastrophe components and the conventional component. We distinguish constant and increasing marginal hazards. Moreover, the productivity catastrophe is compared with recoverable catastrophes and with a shock to the climate sensitivity. Finally, we allow for investments in adaptation capital as an alternative to counter the potential adverse effects of climate tipping. Quantitatively, the results are investigated with a calibrated model for the world economy.

    AB - The optimal reaction to a potential productivity shock as a consequence of climate tipping is to substantially tax carbon in order to curb the risk of tipping, but to adjust capital as well in order to smooth consumption when tipping occurs. We also allow for conventional marginal climate damages and decompose the optimal carbon tax in two catastrophe components and the conventional component. We distinguish constant and increasing marginal hazards. Moreover, the productivity catastrophe is compared with recoverable catastrophes and with a shock to the climate sensitivity. Finally, we allow for investments in adaptation capital as an alternative to counter the potential adverse effects of climate tipping. Quantitatively, the results are investigated with a calibrated model for the world economy.

    KW - climate tipping point

    KW - risk

    KW - social cost of carbon

    KW - precautionary capital

    KW - economic growth

    U2 - 10.1007/s10640-018-0231-2

    DO - 10.1007/s10640-018-0231-2

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