Stranded Assets, the Social Cost of Carbon, and Directed Technical Change: Macroeconomic Dynamics of Optimal Climate Policy

28 Pages Posted: 24 Mar 2016

See all articles by Rick van der Ploeg

Rick van der Ploeg

University of Oxford

Armon Rezai

Vienna University of Economics and Business

Date Written: February 2016

Abstract

The tractable general equilibrium model developed by Golosov et al. (2014), GHKT for short, is modified to allow for stock-dependent fossil fuel extraction costs and partial exhaustion of fossil fuel reserves, a negative impact of global warming on growth, mean reversion in climate damages, steady labour-augmenting technical progress, specific green technical progress driven by learning by doing, population growth, and a direct effect of the stock of atmospheric carbon on instantaneous welfare. We characterize the social optimum and derive simple rule for both the optimal carbon tax and the renewable energy subsidy, and characterize the optimal amount of untapped fossil fuel.

Keywords: social cost of carbon, carbon tax, renewable energy subsidy, general equilibrium, Ramsey growth, capital accumulation, stranded assets, simple rules

JEL Classification: H210, Q510, Q540

Suggested Citation

van der Ploeg, Frederick and Rezai, Armon, Stranded Assets, the Social Cost of Carbon, and Directed Technical Change: Macroeconomic Dynamics of Optimal Climate Policy (February 2016). CESifo Working Paper Series No. 5787, Available at SSRN: https://ssrn.com/abstract=2754065 or http://dx.doi.org/10.2139/ssrn.2754065

Frederick Van der Ploeg

University of Oxford ( email )

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

Armon Rezai (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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