Climate Change and Carbon Tax Expectations

35 Pages Posted: 7 Mar 2010

See all articles by Michael Hoel

Michael Hoel

University of Oslo; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: February 2010

Abstract

If investors fear that future carbon taxes will be lower than currently announced by policy makers, long-run investments in greenhouse gas mitigation may be smaller than desirable. On the other hand, owners of a non-renewable carbon resource that underestimate future carbon taxes will postpone extraction compared with what they would have chosen had the policymakers been able to commit to the optimal tax path. If extraction costs rise rapidly as accumulated extraction rises, near-term emissions increase as a consequence of a downward bias in the expected future carbon taxes. Whether investments in greenhouse gas mitigation go up or down due to the expectation error depends on the time profile of the returns to the investment.

Keywords: climate change, exhaustible resources, carbon tax

JEL Classification: H23, Q30, Q42, Q54

Suggested Citation

Hoel, Michael, Climate Change and Carbon Tax Expectations (February 2010). CESifo Working Paper Series No. 2966, Available at SSRN: https://ssrn.com/abstract=1564032

Michael Hoel (Contact Author)

University of Oslo ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway
+ 47 22 85 83 87 (Phone)
+ 47 22 85 50 35 (Fax)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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