Abstract
The optimal reaction to a potential productivity shock as a consequence of climate tipping is to substantially tax carbon in order to curb the risk of tipping, but to adjust capital as well in order to smooth consumption when tipping occurs. We also allow for conventional marginal climate damages and decompose the optimal carbon tax in two catastrophe components and the conventional component. We distinguish constant and increasing marginal hazards. Moreover, the productivity catastrophe is compared with recoverable catastrophes and with a shock to the climate sensitivity. Finally, we allow for investments in adaptation capital as an alternative to counter the potential adverse effects of climate tipping. Quantitatively, the results are investigated with a calibrated model for the world economy.
Highlights
The standard recipe in handling climate change is to call for a global tax on carbon that is equal to the present value of all future marginal damages arising from emitting one ton of B Aart de ZeeuwF. van der Ploeg, A. de Zeeuw carbon today (e.g., Nordhaus 2008; Stern 2007; Golosov et al 2014)
The second response follows from adjustments to the Keynes–Ramsey rule in the Ramsey growth model with tipping, which is the focus of a companion paper
Climate change will probably manifest itself in the future as a regime shift in the climate system resulting from a climate tipping point (Lenton and Ciscar 2013)
Summary
F. van der Ploeg, A. de Zeeuw carbon today (e.g., Nordhaus 2008; Stern 2007; Golosov et al 2014). It discusses regime shifts with a sudden increase in climate sensitivity, and recoverable catastrophes that destroy a part of the capital stock or that lead to a sudden release of atmospheric carbon.
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