The Opportunity Cost of Climate Policy: A Question of Reference

Rezai, Armon (2011) The Opportunity Cost of Climate Policy: A Question of Reference. Scandinavian Journal of Economics, 113 (4). pp. 885-903. ISSN 0347-0520


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The cost of climate policy depends on the no-policy alternative without which the opportunity cost of climate action cannot be determined. This reference path has to reflect the current failure in the market for carbon emissions: due to a negative externality, private investment decisions do not consider the climate damage they entail; agents overinvest in conventional capital and underinvest in climate capital. Internalization of climate damage lowers the private return to capital; agents reduce investment in favor of mitigation and consumption. Optimal climate mitigation increases welfare of the present and the future. Simulation of the inefficient no-policy scenario in DICE-07 confirms that this point numerically. (author's abstract)

Item Type: Article
Additional Information: To see the final version of this paper please visit the publisher's website. The definitive version is available at Access to the published version may require a subscription.
Keywords: climate policy / intergenerational equity / sacrifice / externality / market failure / DICE-07
Classification Codes: JEL C61, C70, D62, E24, H23, Q54
Divisions: Departments > Sozioökonomie > Multi-Level Governance and Development
Version of the Document: Submitted
Variance from Published Version: Major
Depositing User: Dissertation Administrator
Date Deposited: 28 Mar 2012 12:32
Last Modified: 28 Jul 2015 10:25


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