On current and future carbon prices in a risky world
Frederick (Rick) van der Ploeg and
Sweder van Wijnbergen
No 21-045/VI, Tinbergen Institute Discussion Papers from Tinbergen Institute
We analyse optimal abatement and carbon pricing strategies under a variety of economic, temperature and damage risks. Economic growth, convex damages and temperature-dependent risks of climatic tipping points lead to higher growth rates, but gradual resolution of uncertainty lowers them. For temperature-dependent economic damage tipping points, carbon prices are higher, but when the tipping point occurs, the price jumps downward. With only a temperature cap the carbon price rises at the risk-adjusted interest rate. Adding damages leads to a higher carbon price that grows more slowly. But as temperature and cumulative emissions get closer to their caps, the carbon price is ramped up ever more. Policy makers should commit to a rising path of carbon prices.
Keywords: CO2 prices; growth uncertainty; tipping points; damages; gradual resolution of damage uncertainty; temperature caps (search for similar items in EconPapers)
JEL-codes: H23 Q51 Q54 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env, nep-reg and nep-res
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Journal Article: On current and future carbon prices in a risky world (2023)
Working Paper: On Current and Future Carbon Prices in a Risky World (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20210045
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