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Optimal Carbon Taxes with Non-Constant Time Preference

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

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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.

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