Iverson, Terrence (2012): Optimal Carbon Taxes with Non-Constant Time Preference.
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Abstract
The paper derives an explicit formula for the near-term carbon price in a dynamic stochastic general equilibrium climate model in which agents employ arbitrary non-constant time preference rates. The paper uses a simplified version of the model in Golosov et al. (2011), though we argue that the added assumptions are unlikely to matter for our conclusions. The formula is derived first under the assumption that the initial decision-maker has a commitment device, then solving for the unique subgame perfect equilibrium. Somewhat remarkably, the near-term carbon price is the same in both cases. We further show that the near-term carbon price remains unchanged for all potential beliefs about the time preference structure of future generations. It follows that concerns about time inconsistency can be safely ignored when applying the derived formula. The carbon price is the same as the Pigouvian tax in the equilibrium with commitment, and it is bigger than the Pigouvian tax in the equilibrium without commitment provided damages are sufficiently persistent. The formula reduces to the carbon price formula in Golosov et al. (2011) when discounting is constant, and it reduces to the carbon price formula in Gerlagh and Liski (2012) when discounting is quasi-hyperbolic.
Item Type: | MPRA Paper |
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Original Title: | Optimal Carbon Taxes with Non-Constant Time Preference |
Language: | English |
Keywords: | hyperbolic discounting; time inconsistency; optimal carbon price |
Subjects: | Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics |
Item ID: | 49035 |
Depositing User: | Terrence W Iverson |
Date Deposited: | 13 Aug 2013 05:11 |
Last Modified: | 26 Sep 2019 15:03 |
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URI: | https://mpra.ub.uni-muenchen.de/id/eprint/49035 |
Available Versions of this Item
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Optimal Carbon Taxes with Non-Constant Time Preference. (deposited 14 Dec 2012 05:33)
- Optimal Carbon Taxes with Non-Constant Time Preference. (deposited 13 Aug 2013 05:11) [Currently Displayed]