Steering the Climate System: Using Inertia to Lower the Cost of Policy
University of Arizona Department of Economics Working Paper No. 14-03
34 Pages Posted: 31 May 2014 Last revised: 25 Jul 2015
Date Written: July 24, 2014
Conventional wisdom holds that the efficient way to limit warming to a chosen level is to price carbon emissions at a rate that increases exponentially. We show that this "Hotelling" tax on carbon emissions is actually inefficient. The least-cost policy path takes advantage of the climate system's inertia by growing more slowly than exponentially. Carbon dioxide temporarily overshoots the steady-state level consistent with the temperature limit, and the efficient carbon tax follows an inverse-U-shaped path. Economic models that assume exponentially increasing carbon taxes are overestimating the minimum cost of limiting warming, overestimating the efficient near-term carbon tax, and overvaluing technologies that mature sooner.
Keywords: climate, hotelling, emissions, inertia, tax, carbon, abatement, dynamics
JEL Classification: H23, Q54, Q58
Suggested Citation: Suggested Citation