Pareto-Improving Carbon-Risk Taxation

Laurence Kotlikoff, Felix Kubler, Andrey Polbin and Simon Scheidegger

No 26919, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Anthropogenic climate change produces two conceptually distinct negative economic externalities. The first is an expected path of climate damage. The second, which is this paper's focus, is an expected path of economic risk. To isolate the climate-risk problem, we consider 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. Our model exhibits a de minimis climate problem absent its shocks. But 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 or larger than the carbon average-damage tax, which is focused exclusively on limiting average damage.

JEL-codes: F0 F20 H0 H2 H3 J20 (search for similar items in EconPapers)
Date: 2020-04
New Economics Papers: this item is included in nep-ene, nep-env, nep-pbe and nep-pub
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Published as Laurence Kotlikoff & Felix Kubler & Andrey Polbin & Simon Scheidegger, 2021. "Pareto-improving carbon-risk taxation," Economic Policy, vol 36(107), pages 551-589.

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