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The Simple Arithmetic of Carbon Pricing and Stranded Assets

Frederick (Rick) van der Ploeg () and Armon Rezai

No 197, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: A simple rule for the optimal global price of carbon is presented, which captures the geo-physical, economic, and ethical drivers of climate policy as well as the effect of uncertainty about future growth of consumption. There is also a discussion of the optimal carbon budget and the amount of unburnable carbon and stranded fossil fuel reserves and a back-on-the-envelope expression are given for calculating these. It is also shown how one can derive the end of the carbon era and peak warming. This simple arithmetic for determining climate policy is meant to complement the simulations of large-scale integrated assessment model, and to give analytical understanding of the key determinants of climate policy. The simple rules perform very well in a full integrated assessment model. It is also shown how to take account of a 2°C upper limit on global warming. Steady increases in energy efficiency do not affect the optimal price of carbon, but postpones the carbon-free era somewhat and if technical progress in renewables and economic growth are strong leads to substantially lower cumulative emissions and lower peak global warming.

Keywords: social cost of carbon; climate ethics; prudence; carbon budget; peak warming; end of carbon era; stranded assets; simple rules; energy efficiency (search for similar items in EconPapers)
JEL-codes: H21 Q51 Q54 (search for similar items in EconPapers)
Date: 2017-09-28
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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Working Paper: The simple arithmetic of carbon pricing and stranded assets (2018) Downloads
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