Prices and Taxes in a Ramsey Climate Policy Model under Heterogeneous Beliefs and Ambiguity

Peter von zur Muehlen ()

Economies, 2022, vol. 10, issue 10, 1-56

Abstract: In a Ramsey policy regime, heterogeneity in beliefs about the potential costs of climate change is shown to produce policy ambiguities that alter carbon prices and taxation. Three sources of ambiguity are considered: (i) the private sector is skeptical, with beliefs that are unknown to the government, (ii) private agents have pessimistic doubts about the model, or (iii) the policy authority itself does not trust the extant scientific climate model and fears the worst. These three sources of ambiguity give rise to four potential belief regimes characterized by differentials between the government’s and the private sector’s inter-temporal rates of substitutions, with implications for the prices of carbon and capital, framed in terms of distorted Arrow–Debreu pricing theory that establishes an equivalence between the optimal carbon tax and the permit price of an underlying asset—the government-imposed limit on emissions in economies with cap and trade. This paper shows that in most instances, skeptical beliefs and resulting ambiguities justify higher carbon taxes and lower capital taxes to offset the private sector’s increased myopia compared with rational expectations. Conversely, ambiguities created by worst-case fears in either the private sector or in government tend produce forces in the opposite direction.

Keywords: Knightian uncertainty; multiplier preferences; Ramsey planner; social planner; carbon tax; capital tax; ambiguity premium; dynamic stochastic integrated general equilibrium (DSIGE); robust Arrow–Debreu asset prices (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2227-7099/10/10/257/pdf (application/pdf)
https://www.mdpi.com/2227-7099/10/10/257/ (text/html)

Related works:
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:gam:jecomi:v:10:y:2022:i:10:p:257-:d:944292

Access Statistics for this article

Economies is currently edited by Ms. Adore Zhou

More articles in Economies from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().