The simple arithmetic of carbon pricing and stranded assets

van der Ploeg, Frederick and Rezai, Armon (2018) The simple arithmetic of carbon pricing and stranded assets. Ecological Economic Papers, 22. WU Vienna University of Economics and Business, Vienna.


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A simple rule for the optimal global price of carbon is presented, which captures the geo-physical, economic, and ethical drivers of climate policy as well as the effect of uncertainty about future growth of consumption. There is also a discussion of the optimal carbon budget and the amount of unburnable carbon and stranded fossil fuel reserves and a back-on-the-envelope expression are given for calculating these. It is also shown how one can derive the end of the carbon era and peak warming. This simple arithmetic for determining climate policy is meant to complement the simulations of large-scale integrated assessment model, and to give analytical understanding of the key determinants of climate policy. The simple rules perform very well in a full integrated assessment model. It is also shown how to take account of a 2 °C upper limit on global warming. Steady increases in the efficiency of labour do not affect the optimal price of carbon or the safe carbon budget, but do postpone the carbon-free era.

Item Type: Paper
Keywords: social cost of carbon, climate ethics, prudence, carbon budget, peak warming, end of carbon era, stranded assets, simple rules, energy efficiency
Classification Codes: JEL H21, Q51, Q54
Divisions: Departments > Sozioökonomie > Ecological Economics
Depositing User: Daniel Schmelz
Date Deposited: 27 Mar 2019 13:45
Last Modified: 22 Oct 2019 00:41


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