Steering the Climate System: Using Inertia to Lower the Cost of Policy

Derek Lemoine and Ivan Rudik

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: Conventional wisdom holds that the efficient way to limit warming to a chosen level is to price carbon emissions at a rate that increases exponentially. We show that this “Hotelling” tax on carbon emissions is actually inefficient. The least-cost policy path takes advantage of the climate system’s inertia by growing more slowly than exponentially. Carbon dioxide temporarily overshoots the steady-state level consistent with the temperature limit, and the efficient carbon tax follows an inverse-U-shaped path. Economic models that assume exponentially increasing carbon taxes are overestimating the minimum cost of limiting warming, overestimating the efficient near-term carbon tax, and overvaluing technologies that mature sooner.

Date: 2015-07-01
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Journal Article: Steering the Climate System: Using Inertia to Lower the Cost of Policy (2017)
Working Paper: Steering the Climate System: Using Inertia to Lower the Cost of Policy (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:isu:genstf:201507010700001014

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