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

See all articles by Derek Lemoine

Derek Lemoine

University of Arizona - Department of Economics

Ivan Rudik

Cornell University - Dyson School of Applied Economics and Management

Date Written: July 24, 2014

Abstract

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

Lemoine, Derek and Rudik, Ivan, Steering the Climate System: Using Inertia to Lower the Cost of Policy (July 24, 2014). University of Arizona Department of Economics Working Paper No. 14-03. Available at SSRN: https://ssrn.com/abstract=2443594 or http://dx.doi.org/10.2139/ssrn.2443594

Derek Lemoine (Contact Author)

University of Arizona - Department of Economics ( email )

McClelland Hall
Tucson, AZ 85721-0108
United States

HOME PAGE: http://www.dereklemoine.com/

Ivan Rudik

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

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