TY - JOUR
T1 - Steering the climate system
T2 - Using inertia to lower the cost of policy
AU - Lemoine, Derek
AU - Rudik, Ivan
N1 - Funding Information:
* Lemoine: Department of Economics, University of Arizona, 1130 E Helen Street, McClelland 401, Tucson, AZ 85721 and NBER (email: dlemoine@email.arizona.edu); Rudik: Department of Economics and Center for Agricultural and Rural Development, Iowa State University, 260 Heady Hall, Ames, IA 50011 (email: irudik@ iastate.edu). This paper was accepted to the AER under the guidance of Debraj Ray, Coeditor. This work was supported by the University of Arizona’s Renewable Energy Network, with special thanks to Ardeth Barnhart and Stan Reynolds. We thank Haewon McJeon for helpful comments. The authors declare that they have no relevant or material financial interests that relate to the research described in this paper.
PY - 2017/10
Y1 - 2017/10
N2 - Common views hold that the efficient way to limit warming to a chosen level is to price carbon emissions at a rate that increases exponentially. We show that this Hotelling tax on carbon emissions is actually inefficient. The least-cost policy path takes advantage of the climate system's inertia to delay reducing emissions and allow greater cumulative emissions. The efficient carbon tax follows an inverse-U-shaped path and grows more slowly than the Hotelling tax. Economic models that assume exponentially increasing carbon taxes are overestimating the cost of limiting warming, overestimating the efficient near-term carbon tax, and overvaluing technologies that mature sooner.
AB - Common views hold that the efficient way to limit warming to a chosen level is to price carbon emissions at a rate that increases exponentially. We show that this Hotelling tax on carbon emissions is actually inefficient. The least-cost policy path takes advantage of the climate system's inertia to delay reducing emissions and allow greater cumulative emissions. The efficient carbon tax follows an inverse-U-shaped path and grows more slowly than the Hotelling tax. Economic models that assume exponentially increasing carbon taxes are overestimating the cost of limiting warming, overestimating the efficient near-term carbon tax, and overvaluing technologies that mature sooner.
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U2 - 10.1257/aer.20150986
DO - 10.1257/aer.20150986
M3 - Article
AN - SCOPUS:85030684631
VL - 107
SP - 2947
EP - 2957
JO - American Economic Review
JF - American Economic Review
SN - 0002-8282
IS - 10
ER -