Campus Units

Economics, Center for Agricultural and Rural Development

Document Type

Article

Publication Version

Published Version

Publication Date

10-2017

Journal or Book Title

American Economic Review

Volume

107

Issue

10

First Page or Article ID Number

2947

Last Page

2957

DOI

10.1257/aer.20150986

Abstract

Common views hold that the efficient way to limit warming to a chosen level is to price carbon emissions at a rate that increases exponentially. We show that this Hotelling tax on carbon emissions is actually inefficient. The least-cost policy path takes advantage of the climate system's inertia to delay reducing emissions and allow greater cumulative emissions. The efficient carbon tax follows an inverse-U-shaped path and grows more slowly than the Hotelling tax. Economic models that assume exponentially increasing carbon taxes are overestimating the cost of limiting warming, overestimating the efficient near-term carbon tax, and overvaluing technologies that mature sooner.

JEL Classification

H23, Q54, Q58

Comments

This article is published as Lemoine, Derek, and Ivan Rudik. 2017. "Steering the Climate System: Using Inertia to Lower the Cost of Policy." American Economic Review, 107 (10): 2947-57. DOI: 10.1257/aer.20150986. Posted with permission.

Copyright Owner

American Economic Association

Language

en

File Format

application/pdf

Working Paper

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