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GROWTH, RENEWABLES, AND THE OPTIMAL CARBON TAX

Authors

  • FREDERICK VAN DER PLOEG,

    Corresponding author
    1. University of Oxford, U.K.
    2. VU University Amsterdam, the Netherlands
    • Please address correspondence to: Frederick van der Ploeg, Department of Economics, University of Oxford, Manor Road Building, Oxford OX1 3 UQ, U.K. E-mail: rick.vanderploeg@economics.ox.ac.uk.

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  • CEES WITHAGEN

    1. VU University Amsterdam, the Netherlands
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    • Useful comments from Gerard van der Meijden, Tony Venables, Hans-Werner Sinn, seminar participants at Munich, Toulouse, UCL, Bern, Paris, Montpellier, Siegen, Stockholm, St. Petersburg, and Oxcarre and conference participants at EAERE 2011, Rome, SURED 2012, Ascona and NORKLIMA, Oslo, June 2012 are gratefully acknowledged. Frederick van der Ploeg gratefully acknowledges support from the BP funded Oxford Centre for the Analysis of Resource Rich Economies and the ERC Advanced Instigator Grant “Political Economy of Green Paradoxes.”


Abstract

Optimal climate policy is investigated in a Ramsey growth model of the global economy with exhaustible oil reserves, an infinitely elastic supply of renewables, stock-dependent oil extraction costs, and convex climate damages. Four regimes can occur, depending on the initial social cost of oil being larger or smaller than that of renewables and depending on the initial oil stock being large or small. We also offer some policy simulations for the first and second regime, which illustrate that with a lower discount rate more oil is left in situ and renewables are phased in more quickly. We identify the conditions under which the optimal carbon tax rises or decreases. Subsidizing renewables (without a carbon tax) induces more oil to be left in situ and a quicker phasing in of renewables, but oil is depleted more rapidly initially. The net effect on global warming is ambiguous.

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