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An explicit formula for optimal carbon taxes under general economic settings

Author

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  • Chuan-Zhong, Li

    (Department of Economics)

Abstract

The paper develops an explicit formula for the calculation of optimal carbon taxes in a dynamic integrated assessment framework. We attempt to generalize the Gosolov et al. (2014) theory by relaxing the restrictions with logarithmic preferences, Cobb-Douglas production and the full periodwise capital depreciation. By taking advantage of the cumulative climate response (CCR) function, we show that all that matters for the tax formula from the economic module pins down to a single economic parameter i.e. a weighted harmonic mean of the growth-adjusted consumption rate of discount. We demonstrate the theory with a stylized climate-economy model with depletable fossil resources, test the formula with the new DICE2016 model, and provide an application to the real world economy beyond any integrated modeling framework.

Suggested Citation

  • Chuan-Zhong, Li, 2018. "An explicit formula for optimal carbon taxes under general economic settings," Working Paper Series 2018:1, Uppsala University, Department of Economics.
    • Handle: RePEc:hhs:uunewp:2018_001
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    More about this item

    Keywords

    Climate change; analytical integrated assessment; optimal carbon tax; harmonic mean; DICE model monic mean; DICE model;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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