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American Economic Review Vol. 107 No. 10 2017

Steering the Climate System: Using Inertia to Lower the Cost of Policy

Derek Lemoine1; Ivan Rudik2

1 Department of Economics, University of Arizona, 1130 E Helen Street, McClelland 401, Tucson, AZ 85721 and NBER (email: ) · 2 Department of Economics and Center for Agricultural and Rural Development, Iowa State University, 260 Heady Hall, Ames, IA 50011 (email: )

Abstract

Common views hold that the efficient way to limit warming to a chosen level is to price carbon emissions at a rate that increases exponentially. We show that this Hotelling tax on carbon emissions is actually inefficient. The least-cost policy path takes advantage of the climate system's inertia to delay reducing emissions and allow greater cumulative emissions. The efficient carbon tax follows an inverse-U-shaped path and grows more slowly than the Hotelling tax. Economic models that assume exponentially increasing carbon taxes are overestimating the cost of limiting warming, overestimating the efficient near-term carbon tax, and overvaluing technologies that mature sooner.

DOI
10.1257/aer.20150986
Volume
107
Issue
10
Pages
2947-2957
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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