Climate change policy in a growing economy under catastrophic risks

Under risk of catastrophic climate change, the occurrence hazard is added to the social discount rate. As a result, the social discount rate (i) increases and (ii) turns endogenous to the global warming policy. The second effect bears profound policy implications that are magnifed by economic growth. In particular, it implies that green- house gases (GHG) emission should gradually be brought to a halt. Due to the public bad nature of the catastrophic risk, the second effect is ignored in a competitive allocation and unregulated economic growth will give rise to excessive emissions. We find that the GHG emission paths under the optimal and competitive growth regimes lie at the extreme ends of the range of feasible emissions. We derive the Pigouvian hazard tax that implements the optimal growth regime.

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Working or Discussion Paper
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JEL Codes:
H23; H41; O13; O40; Q54; Q58
Series Statement:
Discussion Paper
No. 13.07

 Record created 2017-04-01, last modified 2018-01-22

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