The Optimal Path of Energy and Co2 Taxes for Intertemporal Resource Allocation

36 Pages Posted: 11 Sep 2001

See all articles by Klaus Conrad

Klaus Conrad

University of Mannheim - Department of Economics

Date Written: August 2001

Abstract

The purpose of this paper is to extend the dynamic resource allocation problem by including stock externalities like accumulated CO2 and SO2 emissions as well as flow externalities like waste of energy or pollutants which can be abated (SO2). The objective is to examine how the evolution of energy-, CO2- or SO2-tax rates can address these problems in an optimal way. The concern about the time profile of an energy tax arises from the fact that fossil fuels are an exhaustible resource and that global warming, being a consequence of carbon accumulation in the atmosphere, is a stock externality problem. We use a micro model of a firm, which maximizes profits, uses energy as one of its inputs and is confronted with a varying energy tax. It reacts by substitution, by changing its output level, by investing in energy efficient technology or by purchasing abatement equipment. The government is well aware about firms reaction on price signals. It maximizes a stream of social welfare by choosing an optimal path of its instrument-an energy tax. Our analyses supports the idea of a first rising and later falling tax over time.

JEL Classification: Q32, L72, D99

Suggested Citation

Conrad, Klaus, The Optimal Path of Energy and Co2 Taxes for Intertemporal Resource Allocation (August 2001). Available at SSRN: https://ssrn.com/abstract=269395

Klaus Conrad (Contact Author)

University of Mannheim - Department of Economics ( email )

Seminargebaeude A5
68131 Mannheim
Germany
+49 621 1811896 (Phone)
+49 621 1811893 (Fax)

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