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OPTIMAL CARBON PRICING IN GENERAL EQUILIBRIUM: Temperature caps and stranded assets in an extended annual DSGE model

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

No 227, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: The general equilibrium model developed by Golosov et al. (2014), GHKT for short, is modified to allow for additional negative impacts of global warming on utility and productivity growth, mean reversion in the ratio of climate damages to production, labour-augmenting technical progress, and population growth. We also replace the GHKT assumption of full depreciation of capital each decade by annual logarithmic depreciation. Furthermore, we allow the government to use a lower discount rate than the private sector. We derive a tractable rule for the optimal carbon price for each of these extensions. We then simplify the GHKT model by modelling temperature as cumulative emissions and calibrating it to Burke et al. (2015) damages. Finally, we consider how the rule for the optimal carbon price must be modified to allow for a temperature cap, and what this implies for stranded oil and gas reserves. We illustrate our analytical results with a range of optimal policy simulations.

Keywords: carbon price; tractable rule; general equilibrium; utility and growth damages; technical progress; population growth; logarithmic depreciation; differential discount rates; temperature cap; stranded oil and gas reserves (search for similar items in EconPapers)
JEL-codes: H21 Q51 Q54 (search for similar items in EconPapers)
Date: 2021-01-27
New Economics Papers: this item is included in nep-dge, nep-ene and nep-env
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Working Paper: Optimal Carbon Pricing in General Equilibrium: Temperature Caps and Stranded Assets in an Extended Annual DSGE Model (2020) Downloads
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