Pareto-improving carbon-risk taxation

The environment and directed technical change

Laurence Kotlikoff, Felix Kubler, Andrey Polbin and Simon Scheidegger

Economic Policy, 2021, vol. 36, issue 107, 551-589

Abstract: SummaryAnthropogenic climate change produces two conceptually distinct negative economic externalities. The first is an expected path of climate damage. The second, the focus of this paper, is an expected path of economic risk. To isolate the climate-risk problem, we consider three mean-zero, symmetric shocks in our 12-period, overlapping generations model. These shocks impact dirty energy usage (carbon emissions), the relationship between carbon concentration and temperature and the connection between temperature and damages. By construction, our model exhibits a de minimis climate problem absent its shocks. However, due to non-linearities, symmetric shocks deliver negatively skewed impacts, including the potential for climate disasters. As we show, Pareto-improving carbon taxation can dramatically lower climate risk, in general, and disaster risk, in particular. The associated climate-risk tax, which is focused exclusively on limiting climate risk, can be as large as, or larger than, the carbon average-damage tax, which is focused exclusively on limiting average damage.

Keywords: climate change; uncertainty; carbon taxes; environmental policy; clean energy; externalities; generational equity; economic efficiency; Pareto optimality (search for similar items in EconPapers)
JEL-codes: F0 F20 H0 H2 H3 J20 (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (8)

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Working Paper: Pareto-Improving Carbon-Risk Taxation (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:ecpoli:v:36:y:2021:i:107:p:551-589.

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