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An explicit formula for optimal carbon taxes under general economic settings

Chuan-Zhong Li

Abstract:

The paper develops an explicit formula for the calculation of optimal carbon taxes in a dynamic integrated assessment framework. We attempt to generalize the Gosolov et al. (2014) theory by relaxing the restrictions with logarithmic preferences, Cobb-Douglas production and the full periodwise capital depreciation. By taking advantage of the cumulative climate response (CCR) function, we show that all that matters for the tax formula from the economic module pins down to a single economic parameter i.e. a weighted harmonic mean of the growth-adjusted consumption rate of discount. We demonstrate the theory with a stylized climate-economy model with depletable fossil resources, test the formula with the new DICE2016 model, and provide an application to the real world economy beyond any integrated modeling framework.

Keywords: Climate change, analytical integrated assessment, optimal carbon tax, har- monic mean, DICE model

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