Growth, Renewables, and the Optimal Carbon Tax

29 Pages Posted: 25 Jan 2014

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: February 2014

Abstract

Optimal climate policy is investigated in a Ramsey growth model of the global economy with exhaustible oil reserves, an infinitely elastic supply of renewables, stock‐dependent oil extraction costs, and convex climate damages. Four regimes can occur, depending on the initial social cost of oil being larger or smaller than that of renewables and depending on the initial oil stock being large or small. We also offer some policy simulations for the first and second regime, which illustrate that with a lower discount rate more oil is left in situ and renewables are phased in more quickly. We identify the conditions under which the optimal carbon tax rises or decreases. Subsidizing renewables (without a carbon tax) induces more oil to be left in situ and a quicker phasing in of renewables, but oil is depleted more rapidly initially. The net effect on global warming is ambiguous.

Suggested Citation

van der Ploeg, Frederick and Withagen, Cees A. M., Growth, Renewables, and the Optimal Carbon Tax (February 2014). International Economic Review, Vol. 55, Issue 1, pp. 283-311, 2014. Available at SSRN: https://ssrn.com/abstract=2384235 or http://dx.doi.org/10.1111/iere.12049

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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