Growth and the Optimal Carbon Tax: When to Switch from Exhaustible Resources to Renewables?

43 Pages Posted: 31 Jan 2011

See all articles by Rick van der Ploeg

Rick van der Ploeg

University of Oxford

Cees Withagen

Free University of Amsterdam; Tilburg University

Date Written: January 2011

Abstract

Optimal climate policy is studied in a Ramsey growth model. A developing economy weighs global warming less, hence is more likely to exhaust fossil fuel and exacerbate global warming. The optimal carbon tax is higher for a developed economy. We analyze the optimal time of transition from fossil fuel to renewables, amount of fossil fuel to leave in situ, and carbon tax. Subsidizing a backstop without an optimal carbon tax induces more fossil fuel to be left in situ and a quicker phasing in of renewables, but fossil fuel is depleted more quickly. Global warming need thus not be alleviated.

Keywords: carbon tax, exhaustible resources, global warming, Green Paradox, growth, intergenerational inequality aversion, renewables, second best

JEL Classification: D90, E13

Suggested Citation

van der Ploeg, Frederick and Withagen, Cees A. M., Growth and the Optimal Carbon Tax: When to Switch from Exhaustible Resources to Renewables? (January 2011). CEPR Discussion Paper No. DP8215. Available at SSRN: https://ssrn.com/abstract=1749856

Frederick Van der Ploeg (Contact Author)

University of Oxford ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

Cees A. M. Withagen

Free University of Amsterdam ( email )

Tinbergen Institute De Boelelaan 1105
1081 HV Amsterdam
Netherlands

Tilburg University ( email )

Postbus 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

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