Abstract
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.
| Language | English (US) |
|---|---|
| Pages | 2947-2957 |
| Number of pages | 11 |
| Journal | American Economic Review |
| Volume | 107 |
| Issue number | 10 |
| DOIs | |
| State | Published - Oct 1 2017 |
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ASJC Scopus subject areas
- Economics and Econometrics
Cite this
Steering the climate system : Using inertia to lower the cost of policy. / Lemoine, Derek M; Rudik, Ivan.
In: American Economic Review, Vol. 107, No. 10, 01.10.2017, p. 2947-2957.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Steering the climate system
T2 - American Economic Review
AU - Lemoine, Derek M
AU - Rudik, Ivan
PY - 2017/10/1
Y1 - 2017/10/1
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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UR - http://www.scopus.com/inward/citedby.url?scp=85030684631&partnerID=8YFLogxK
U2 - 10.1257/aer.20150986
DO - 10.1257/aer.20150986
M3 - Article
VL - 107
SP - 2947
EP - 2957
JO - American Economic Review
JF - American Economic Review
SN - 0002-8282
IS - 10
ER -