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

Frederick (Rick) van der Ploeg and Cees Withagen

No 8215, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: 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.

Keywords: Carbon tax; Renewables; Exhaustible resources; Growth; Intergenerational inequality aversion; Second best; Green paradox; Global warming (search for similar items in EconPapers)
JEL-codes: D90 E13 (search for similar items in EconPapers)
Date: 2011-01
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Citations: View citations in EconPapers (6)

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