Steering the Climate System: Using Inertia to Lower the Cost of Policy
Derek Lemoine and
American Economic Review, 2017, vol. 107, issue 10, 2947-57
Common views hold that the efficient way to limit warming to a chosen level is to price carbon emissions at a rate that increases exponentially. We show that this Hotelling tax on carbon emissions is actually inefficient. The least-cost policy path takes advantage of the climate system's inertia to delay reducing emissions and allow greater cumulative emissions. The efficient carbon tax follows an inverse-U-shaped path and grows more slowly than the Hotelling tax. Economic models that assume exponentially increasing carbon taxes are overestimating the cost of limiting warming, overestimating the efficient near-term carbon tax, and overvaluing technologies that mature sooner.
JEL-codes: H23 Q54 Q58 (search for similar items in EconPapers)
Note: DOI: 10.1257/aer.20150986
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