Abstract
A simple rule for the optimal global price of carbon is presented, which captures the geophysical, economic, and ethical drivers of climate policy as well as the effect of uncertainty about future growth of consumption. There is also a discussion of the optimal carbon budget and the amount of unburnable carbon and stranded fossil fuel reserves and a back-on-the-envelope expression are given for calculating these. It is also shown how one can derive the end of the carbon era and peak warming. This simple arithmetic for determining climate policy is meant to complement the simulations of large-scale integrated assessment model, and to give analytical understanding of the key determinants of climate policy. The simple rules perform very well in a full integrated assessment model. It is also shown how to take account of a 2 °C upper limit on global warming. Steady increases in energy efficiency do not affect the optimal price of carbon, but postpone the carbon-free era somewhat and if technical progress in renewables and economic growth are strong leads to substantially lower cumulative emissions and lower peak global warming.
Highlights
Climate change is the world largest externality (Stern 2007) and climate policy needs to correct this externality by establishing cost transparency in the energy market
Our assessment of how the optimal carbon price and stranded assets interact with economic growth, renewable energy technology, fossil fuel scarcity, ethical considerations, and fundamental geophysical parameters is transparent and gives easy-tounderstand simple rules that perform well in largescale Integrated assessment models (IAMs)
We hope that our back-on-theenvelope framework allows climate scientists not actively engaged in economic modelling to understand the critical assumptions driving the social cost and price of carbon, untapped fossil fuel and the time to reach the carbon-free era in terms of ethical considerations and expected economic growth and cost reductions in renewable energy
Summary
Climate change is the world largest externality (Stern 2007) and climate policy needs to correct this externality by establishing cost transparency in the energy market. Combining the two approach by maximising welfare net of global warming subject to the cap on peak warming or equivalently subject to cumulative emissions being less than the safe carbon budget gives a higher price of carbon than the unconstrained welfare maximisation which grows at a rate somewhere in between the interest rate and the rate of economic growth (van der Ploeg 2017).
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