On current and future carbon prices in a risky world

Stan Olijslagers, Frederick (Rick) van der Ploeg and Sweder van Wijnbergen

Journal of Economic Dynamics and Control, 2023, vol. 146, issue C

Abstract: We analyse the optimal paths of abatement and carbon prices under a variety of economic, temperature and damage risks. Carbon prices grow in line with economic growth, but with convex damages and temperature-dependent risks of climatic tipping points grow more quickly and with gradual resolution of uncertainty grow more slowly. With temperature-dependent economic damage tipping points carbon prices are higher, but when the tipping point occurs, the price jumps downward. With a temperature cap the efficient carbon price rises at the risk-adjusted interest rate. Allowing for damages as well as a cap leads to a higher carbon price which grows more slowly. But as temperature and cumulative emissions approach their caps, the carbon price is ramped up ever more. Policy makers should expect a rising path of carbon prices.

Keywords: CO2 prices; Growth uncertainty; Tipping points; Damages; Gradual resolution of damage uncertainty; Temperature caps (search for similar items in EconPapers)
JEL-codes: H23 Q51 Q54 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: On Current and Future Carbon Prices in a Risky World (2021)
Working Paper: On current and future carbon prices in a risky world (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:146:y:2023:i:c:s016518892200272x

DOI: 10.1016/j.jedc.2022.104569

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