Optimal carbon pricing in general equilibrium: Temperature caps and stranded assets in an extended annual DSGE model

Frederick (Rick) van der Ploeg and Armon Rezai

Journal of Environmental Economics and Management, 2021, vol. 110, issue C

Abstract: The general equilibrium model developed by Golosov et al. (2014), GHKT for short, is modified to allow for additional negative impacts of global warming on utility and productivity growth, mean reversion in the ratio of climate damages to production, labour-augmenting technical progress, and population growth. We also replace the GHKT assumption of full depreciation of capital each decade by annual logarithmic depreciation. Furthermore, we allow the government to use a lower discount rate than the private sector. We derive a tractable rule for the optimal carbon price for each of these extensions. We then simplify the GHKT model by making temperature a linear function of cumulative emissions and making the proportion of output lost due to global warming a linear function of temperature. Finally, we consider how the rule for the optimal carbon price must be modified to allow for a temperature cap, and what this implies for stranded oil and gas reserves. We illustrate our analytical results with a range of optimal policy simulations.

Keywords: Carbon price; Tractable rule; General equilibrium; Utility and growth damages; Technical progress; Population growth; Logarithmic depreciation; Differential discount rates; Temperature cap; Stranded oil and gas reserves (search for similar items in EconPapers)
JEL-codes: H21 Q51 Q54 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0095069621000875
Full text for ScienceDirect subscribers only

Related works:
Working Paper: OPTIMAL CARBON PRICING IN GENERAL EQUILIBRIUM: Temperature caps and stranded assets in an extended annual DSGE model (2021)
Working Paper: Optimal Carbon Pricing in General Equilibrium: Temperature Caps and Stranded Assets in an Extended Annual DSGE Model (2020)
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:eee:jeeman:v:110:y:2021:i:c:s0095069621000875

DOI: 10.1016/j.jeem.2021.102522

Access Statistics for this article

Journal of Environmental Economics and Management is currently edited by M.A. Cole, A. Lange, D.J. Phaneuf, D. Popp, M.J. Roberts, M.D. Smith, C. Timmins, Q. Weninger and A.J. Yates

More articles in Journal of Environmental Economics and Management from Elsevier
Bibliographic data for series maintained by Catherine Liu ().