Optimal Carbon Taxes with Non-Constant Time Preference

Iverson, Terrence (2013): Optimal Carbon Taxes with Non-Constant Time Preference.

Abstract

Declining time preference rates have a large effect on optimal climate policy, but efforts to surmount time consistency concerns have forced modelers either to employ very simple models or to adopt quasi-hyperbolic rates. Using the integrated assessment model from Golosov, Hassler, Krusell, and Tsyvinski (2013), we derive an explicit formula for the optimal carbon tax when time preference rates are non-constant in an arbitrary way. Concerns about time inconsistency, concerns about multiple equilibria, and concerns about the sensitivity of results to assumptions about future time preferences are all resolved in a straightforward way. Quantitative results show a large effect on optimal policy.

• Item Type: MPRA Paper
• Language: English
• Keywords: discounting; time consistency; climate policy
• Subjects: D - Microeconomics > D6 - Welfare Economics > D61 - Allocative Efficiency ; Cost-Benefit Analysis; D - Microeconomics > D6 - Welfare Economics > D62 - Externalities; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q51 - Valuation of Environmental Effects; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate ; Natural Disasters and Their Management ; Global Warming

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