Abstract
Cumulative emissions drive peak global warming and determine the carbon budget needed to keep temperature below 2 or 1.5 °C. This safe carbon budget is low if uncertainty about the transient climate response is high and risk tolerance (willingness to accept risk of overshooting the temperature target) is low. Together with energy costs, this budget determines the optimal carbon price and how quickly fossil fuel is abated and replaced by renewable energy. This price is the sum of the present discounted value of all future losses in aggregate production due to emitting one ton of carbon today plus the cost of peak warming that rises over time to reflect the increasing scarcity of carbon as temperature approaches its upper limit. If policy makers ignore production losses, the carbon price rises more rapidly. If they ignore the peak temperature constraint, the carbon price rises less rapidly. The alternative of adjusting damages upwards to factor in the peak warming constraint leads initially to a higher carbon price which rises less rapidly.
Highlights
Many economic studies derive optimal climate policies from maximizing social welfare subject to the constraints of an integrated assessment model that combines both a model ofAn early version was presented at the conference BThe Energy Transition, NDCs, and the Post-COP 21 Agenda,^ Marrakesh, 8–9 September 2016, organized by the COP22-Marrakesh, IMF and OCP at SIPA, Columbia University
This carbon price and the time paths for mitigation and abatement are derived from an integrated assessment model and consists of two components: (1) the present discounted value of all future production losses from emitting one ton of carbon today, called the social cost of carbon SCC, which rises at the same rate as world GDP,1 and (2) the cost of staying forever within the safe carbon budget which rises at the real interest rate to reflect the increasing scarcity of carbon as its budget gets closer to exhaustion, called the cost of peak warming CPW
A higher transient climate response to cumulative emissions and a tighter risk tolerance, implies a lower safe carbon budget and that less fossil fuel can be burnt in total, requiring a more ambitious climate policy
Summary
An early version was presented at the conference BThe Energy Transition, NDCs, and the Post-COP 21 Agenda,^ Marrakesh, 8–9 September 2016, organized by the COP22-Marrakesh, IMF and OCP at SIPA, Columbia University. My main aim is to show the drivers of the optimal time path for the carbon price which ensures that cumulative emissions on stay within the safe carbon budget This carbon price and the time paths for mitigation and abatement are derived from an integrated assessment model and consists of two components: (1) the present discounted value of all future production losses from emitting one ton of carbon today, called the social cost of carbon SCC, which rises at the same rate as world GDP, and (2) the cost of staying forever within the safe carbon budget which rises at the real interest rate to reflect the increasing scarcity of carbon as its budget gets closer to exhaustion, called the cost of peak warming CPW.
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