Climate Policy and Catastrophic Change: Be Prepared and Avert Risk

Frederick (Rick) van der Ploeg and Aart de Zeeuw

No CE3S-02/13, CEEES Paper Series from European University at St. Petersburg, Department of Economics

Abstract: The optimal reaction to a pending climate catastrophe is to accumulate capital to be better prepared for the disaster and levy a carbon tax to reduce the risk of the hazard by curbing global warming. The optimal carbon tax consists of the present value of marginal damages, the non-marginal expected change in welfare caused by a marginal higher risk of catastrophe, and the expected loss in after-catastrophe welfare. The last two terms offset precautionary capital accumulation. A linear hazard function calibrated to an expected time of 15 years for a 32% drop in global GDP if temperature stays at 6 degrees Celsius implies with a discount rate of 1.4% a precautionary return of 1.6% and a carbon tax of 136 US $/tC. More intertemporal substitution lowers precautionary capital accumulation and lessens the need for a high carbon tax, but implies less intergenerational inequality aversion which pushes up the carbon tax.

Keywords: non-marginal climate policy; tipping points; risk avoidance; economic growth; social cost of carbon; precaution; adaptation capital (search for similar items in EconPapers)
JEL-codes: D81 H20 O40 Q31 Q38 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2013-10-01
New Economics Papers: this item is included in nep-ene, nep-env and nep-res
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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