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Pareto-Improving Carbon-Risk Taxation

Kotlikoff, Laurence; Kübler, Felix; Polbin, Andrey; Scheidegger, Simon (2021). Pareto-Improving Carbon-Risk Taxation. Economic Policy, 36(107):551-589.

Abstract

Anthropogenic climate change produces two conceptually distinct negative economic externalities. The first is an expected path of climate damage. The second, the focus of this paper, is an expected path of economic risk. To isolate the climate-risk problem, we consider three mean-zero, symmetric shocks in our 12-period, overlapping generations model. These shocks impact dirty energy usage (carbon emissions), the relationship between carbon concentration and temperature and the connection between temperature and damages. By construction, our model exhibits a de minimis climate problem absent its shocks. However, due to non-linearities, symmetric shocks deliver negatively skewed impacts, including the potential for climate disasters. As we show, Pareto-improving carbon taxation can dramatically lower climate risk, in general, and disaster risk, in particular. The associated climate-risk tax, which is focused exclusively on limiting climate risk, can be as large as, or larger than, the carbon average-damage tax, which is focused exclusively on limiting average damage.

Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Finance
Dewey Decimal Classification:330 Economics
Scope:Discipline-based scholarship (basic research)
Language:English
Date:1 July 2021
Deposited On:04 Jan 2022 07:11
Last Modified:24 Jun 2025 01:43
Publisher:Oxford University Press
ISSN:0266-4658
OA Status:Green
Publisher DOI:https://doi.org/10.1093/epolic/eiab008
Official URL:https://academic.oup.com/economicpolicy/article/36/107/551/6133259?login=true
Other Identification Number:merlin-id:20434
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