Pricing carbon and adjusting capital to fend off climate catastrophes

F. van der Ploeg, Aart de Zeeuw

    Research output: Contribution to journalArticleScientificpeer-review

    4 Citations (Scopus)

    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

    Keywords

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

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