The Optimal Carbon Tax and Economic Growth: Additive versus Multiplicative Damages

Armon Rezai, Frederick (Rick) van der Ploeg and Cees Withagen

No CE3S-05/12, CEEES Paper Series from European University at St. Petersburg, Department of Economics

Abstract: In a calibrated integrated assessment model we investigate the differential impact of additive and multiplicative damages from climate change for both a socially optimal and a business-as-usual scenario in the market economy within the context of a Ramsey model of economic growth. The sources of energy are fossil fuel which is available at a cost which rises as reserves diminish and a carbon-free backstop supplied at a decreasing cost. If damages are not proportional to aggregate production output, and the economy is along a development path, the social cost of carbon and the optimal carbon tax are smaller as damages can more easily be compensated for by higher output. As a result, the economy switches later from fossil fuel to the carbon-free backstop and leaves less fossil fuel in situ. This is in contrast to a partial equilibrium analysis with damages in utility rather than in production which finds that the willingness to forsake current consumption to avoid future global warming is higher (lower) under additive damages in a growing economy if the elasticity of intertemporal substitution is smaller (bigger) than one.

Keywords: climate change; multiplicative damages; additive damages; integrated assessment models; Ramsey growth model; fossil fuel; carbon-free backstop (search for similar items in EconPapers)
JEL-codes: H21 Q51 Q54 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2012-09-10
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
https://eusp.org/sites/default/files/econpapers/ce3s-05_12.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eus:ce3swp:0512

Access Statistics for this paper

More papers in CEEES Paper Series from European University at St. Petersburg, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Mikhail Pakhnin ().