Journal
AMERICAN ECONOMIC REVIEW
Volume 107, Issue 10, Pages 2947-2957Publisher
AMER ECONOMIC ASSOC
DOI: 10.1257/aer.20150986
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Funding
- University of Arizona's Renewable Energy Network
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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.
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