Substitutability and the social cost of carbon in a solvable growth model with irreversible climate change

Martin Quaas and Johannes Bröcker

No 2016-09, Economics Working Papers from Christian-Albrechts-University of Kiel, Department of Economics

Abstract: We develop an overlapping generations endogenous growth model with stocks of produced capital, human capital, a non-renewable resource, and irreversibly accumulated greenhouse gases in deterministic and stochastic versions. The model allows for analyzing different elasticities of substitution. We present a full analytical solution and characterization of the transition dynamics. We show that, as a rule of thumb, the social cost of carbon grow at a rate equal to the economy's growth rate divided by the elasticity of substitution. We analytically study sensitivity of the social cost of carbon with respect to key parameters: the intergenerational discount rate, the elasticity of substitution, and climate uncertainty. We show that the social cost of carbon explode at a finite level of log-normally distributed climate uncertainty. We illustrate results in a calibrated version of the model.

Keywords: overlapping generations; substitutes vs. complements; stochastic resource dynamics; optimum growth; climate policy (search for similar items in EconPapers)
JEL-codes: O44 Q32 Q54 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cse, nep-dge, nep-ene, nep-env and nep-gro
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cauewp:201609

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