Optimum Growth and Carbon Policies with Lags in the Climate System

Article

Abstract

We study the optimal carbon tax in an economy in which climate change, stemming from polluting non-renewable resource, affects the economy’s growth potential. Our main contribution is to introduce and explore the natural time lag of the climate system between emissions and damages to capital accumulation in an endogenous growth setting. This allows us to investigate how optimal climate policy, and its interplay with climate dynamics, affect long-run growth and the transition of the economy towards it. Without pollution decay, a higher speed of emissions diffusion steepens the growth profile of the economy. With pollution decay, this leads to lower short-run but higher long-run economic growth during transition. Poor understanding of the emissions diffusion process leads to suboptimal carbon taxes, resource extraction and growth.

Keywords

Climate policy Non-renewable resource dynamics Pollution diffusion lag Optimum growth 

JEL Classification

Q54 O11 Q52 Q32 

Notes

Acknowledgements

This study has benefitted greatly by the comments and suggestions of Julien Daubanes, Alexandra Vinogradova and Andreas Schäfer. Moreover we are grateful for the suggestions of Sjak Smulders and two anonymous referees. We also thank the discussants at the SURED 2014 conference, Ascona–Switzerland, and at the 5th World Congress of Environmental and Resource Economists (2014), Istanbul–Turkey, for their valueable contribution.

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Copyright information

© Springer Science+Business Media Dordrecht 2017

Authors and Affiliations

  1. 1.CER-ETH Center of Economic Research at ETH ZurichZurichSwitzerland

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