The Optimal Carbon Tax With a Tipping Climate and Peak Temperature
31 Pages Posted: 4 Sep 2019 Last revised: 10 Dec 2019
Date Written: September 2, 2019
This paper describes an integrated assessment model with an unknown temperature threshold where severe and irreversible climate impacts, called a tipping point, occurs. The possibility of tipping leads to the following linked outcomes: a prolonged period of peak temperature; a rebound in emissions prior to and during peak temperature; and a fall in the optimal carbon tax as a ratio of output prior to and during peak temperature. Although tipping can occur in any period where temperature rises to a new maximum, the optimal carbon price can be calculated from future temperature outcomes conditional on no tipping. Learning that tipping has not occurred lowers the tax.
Keywords: climate change, tipping points, optimal policy, optimal taxes
JEL Classification: H23, O44, Q30, Q40, Q54, Q56, Q58
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