Mirage on the Horizon: Geoengineering and Carbon Taxation Without Commitment

68 Pages Posted: 9 Mar 2018

See all articles by Daron Acemoglu

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Will Rafey

Massachusetts Institute of Technology (MIT)

Multiple version iconThere are 2 versions of this paper

Date Written: March 6, 2018

Abstract

We show that, in a model without commitment to future policies, geoengineering breakthroughs can have adverse environmental and welfare effects because they change the (equilibrium) carbon taxes. In our model, energy producers emit carbon, which creates a negative environmental externality, and may decide to switch to cleaner technology. A benevolent social planner sets carbon taxes without commitment. Higher future carbon taxes both reduce emissions given technology and encourage energy producers to switch to cleaner technology. Geoengineering advances, which reduce the negative environmental effects of the existing stock of carbon, decrease future carbon taxes and thus discourage private investments in conventional clean technology. We characterize the conditions under which these advances diminish -- rather than improve -- environmental quality and welfare.

Keywords: carbon tax, geoengineering, environment, innovation, time inconsistency

JEL Classification: Q01, Q4, Q54, Q55, Q58, O30, O31, O33, C65

Suggested Citation

Acemoglu, Daron and Rafey, Will, Mirage on the Horizon: Geoengineering and Carbon Taxation Without Commitment (March 6, 2018). MIT Department of Economics Working Paper No. 18-04. Available at SSRN: https://ssrn.com/abstract=3136501 or http://dx.doi.org/10.2139/ssrn.3136501

Daron Acemoglu (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Will Rafey

Massachusetts Institute of Technology (MIT) ( email )

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