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Pricing Carbon and Adjusting Capital to Fend off Climate Catastrophes

Frederick (Rick) van der Ploeg () and Aart de Zeeuw

No 207, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: The optimal reaction to a potential productivity shock as a consequence of climate tipping is to substantially tax carbon in order to curb the risk of tipping, but to adjust capital as well in order to smooth consumption when tipping occurs. We also allow for conventional marginal climate damages and decompose the optimal carbon tax in two catastrophe components and the conventional component. We distinguish constant and increasing marginal hazards. Moreover, the productivity catastrophe is compared with recoverable catastrophes and with a shock to the climate sensitivity. Finally, we allow for investments in adaptation capital as an alternative to counter the potential adverse effects of climate tipping. Quantitatively, the results are investigated with a calibrated model for the world economy.

Keywords: Infrastructure; climate tipping point, risk, social cost of carbon, precautionary capital, economic growth (search for similar items in EconPapers)
JEL-codes: D81 H20 O40 Q31 Q38 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-ene and nep-env
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Journal Article: Pricing Carbon and Adjusting Capital to Fend Off Climate Catastrophes (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:oxf:oxcrwp:207

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