Robustness of a Simple Rule for the Social Cost of Carbon

18 Pages Posted: 16 Apr 2014

See all articles by Armon Rezai

Armon Rezai

Vienna University of Economics and Business

Rick van der Ploeg

University of Oxford

Date Written: April 15, 2015

Abstract

The optimal social cost of carbon is in general equilibrium proportional to GDP if utility is logarithmic, production is Cobb-Douglas, depreciation in 100% every period, climate damages as fraction of production decline exponentially with the stock of atmospheric carbon, and fossil fuel extraction does not require capital. The time profile and size of the optimal carbon tax corresponding to this simple formula are not robust to more convex climate damages, smaller elasticities of factor substitution and varying coefficients of relative intergenerational inequality aversion. The optimal timing of energy transitions and the amount of fossil fuel reserves to be locked up in the earth are also not well predicted by this framework. Still, in terms of welfare and global warming the simple formula manages to get quite close to the first best.

Keywords: social cost of carbon, Ramsey growth, climate damages, energy transitions, stranded fossil, fuel assets, robustness

JEL Classification: H210, Q510, Q540

Suggested Citation

Rezai, Armon and van der Ploeg, Frederick, Robustness of a Simple Rule for the Social Cost of Carbon (April 15, 2015). CESifo Working Paper Series No. 4703, Available at SSRN: https://ssrn.com/abstract=2425507 or http://dx.doi.org/10.2139/ssrn.2425507

Armon Rezai

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Frederick Van der Ploeg (Contact Author)

University of Oxford ( email )

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

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