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Environmental Economics and Policy Studies

, Volume 17, Issue 2, pp 185–210 | Cite as

Untapped fossil fuel and the green paradox: a classroom calibration of the optimal carbon tax

  • Frederick van der PloegEmail author
Research Article Energy and Climate Economics and Policy

Abstract

A classroom model of global warming, fossil fuel depletion and the optimal carbon tax is formulated and calibrated. It features iso-elastic fossil fuel demand, stock-dependent fossil fuel extraction costs, an exogenous interest rate and no decay of the atmospheric stock of carbon. The optimal carbon tax reduces emissions from burning fossil fuel, both in the short and medium run. Furthermore, it brings forward the date that renewables take over from fossil fuel and encourages the market to keep more fossil fuel locked up. A renewables subsidy induces faster fossil fuel extraction and thus accelerates global warming during the fossil fuel phase, but brings forward the carbon-free era, locks up more fossil fuel reserves and thus ultimately curbs cumulative carbon emissions and global warming. For relatively large subsidies social welfare is more likely to fall as the economic costs rises more than proportionally with the size of the subsidy. Our calibration suggests that such subsidies are not a good second-best alternative for the carbon tax. Of course, such subsidies are required if markets fail to internalize learning-by-doing externalities in renewable production.

Keywords

Global warming Social cost of carbon Optimal carbon tax Renewable Energy transitions 

JEL Classification

D81 H20 Q31 Q38 

Notes

Acknowledgments

Support from the European Research Council for the Advanced Instigator Grant ‘Political Economy of Green Paradoxes’ is gratefully acknowledged. I have benefited from many helpful discussions with Armon Rezai and Cees Withagen and useful comments from Florian Habermacher, SamWills, Niko Jaakkola and two anonymous referees

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Copyright information

© Society for Environmental Economics and Policy Studies and Springer Japan 2014

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of OxfordOxfordUK
  2. 2.VU University AmsterdamAmsterdamThe Netherlands

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