On current and future carbon prices in a risky world

Tinbergen Institute Discussion Paper 2021-045/VI

44 Pages Posted: 25 May 2021

See all articles by Stan Olijslagers

Stan Olijslagers

University of Amsterdam

Rick van der Ploeg

University of Oxford - Department of Economics

Sweder van Wijnbergen

Universiteit van Amsterdam; Tinbergen Institute; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 24, 2021

Abstract

We analyse optimal abatement and carbon pricing strategies under a variety of economic, temperature and damage risks. Economic growth, convex damages and temperature-dependent risks of climatic tipping points lead to higher growth rates, but gradual resolution of uncertainty lowers them. For temperature-dependent economic damage tipping points, carbon prices are higher, but when the tipping point occurs, the price jumps downward. With only a temperature cap the carbon price rises at the risk-adjusted interest rate. Adding damages leads to a higher carbon price that grows more slowly. But as temperature and cumulative emissions get closer to their caps, the carbon price is ramped up ever more. Policy makers should commit to a rising path of carbon prices.

Keywords: CO2 prices, growth uncertainty, tipping points, damages, gradual resolution of damage uncertainty, temperature caps

JEL Classification: H23, Q44, Q51, Q54

Suggested Citation

Olijslagers, Stan and der Ploeg, Rick van and van Wijnbergen, Sweder, On current and future carbon prices in a risky world (May 24, 2021). Tinbergen Institute Discussion Paper 2021-045/VI, Available at SSRN: https://ssrn.com/abstract=3851900 or http://dx.doi.org/10.2139/ssrn.3851900

Stan Olijslagers (Contact Author)

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

Rick van Der Ploeg

University of Oxford - Department of Economics ( email )

10 Manor Rd
Oxford, OX1 3UQ
United Kingdom

Sweder Van Wijnbergen

Universiteit van Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4011 / 4203 (Phone)
+31-35-624 91 82 (Fax)

Tinbergen Institute

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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