Pricing carbon in a multi-sector economy with social discounting

Oliver Kalsbach and Sebastian Rausch

Journal of Environmental Economics and Management, 2024, vol. 125, issue C

Abstract: Economists tend to view a uniform emissions price as the most cost-effective approach to reducing greenhouse gas emissions. This paper scrutinizes the assumptions in general equilibrium which underlie the established view that uniform emissions pricing is optimal, focusing on economies where society values the well-being of future generations more than private actors. When social and private discount rates differ, we show that a uniform carbon price is optimal only under restrictive assumptions about technology homogeneity and intertemporal decision-making. Non-uniform pricing spurs capital accumulation and benefits future generations. Depending on sectoral heterogeneity in the substitutability between capital and energy inputs, we find that optimal carbon prices differ widely across sectors and yield substantial welfare gains relative to uniform pricing. Realizing these welfare gains, however, requires that the regulator has information on the technology heterogeneity across sectors. Differentiated carbon pricing based on imperfect estimates of technology heterogeneity can yield significant welfare losses.

Keywords: Sectoral carbon pricing; Differentiated carbon taxes; Climate policy; Social discounting (search for similar items in EconPapers)
Date: 2024
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Working Paper: Pricing Carbon in a Multi-Sector Economy with Social Discounting (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:125:y:2024:i:c:s0095069624000652

DOI: 10.1016/j.jeem.2024.102991

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