American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Optimal Climate Policy When Damages Are Unknown
American Economic Journal: Economic Policy
vol. 12,
no. 2, May 2020
(pp. 340–73)
Abstract
Integrated assessment models (IAMs) are economists' primary tool for analyzing the optimal carbon tax. Damage functions, which link temperature to economic impacts, have come under fire because of their assumptions that may be incorrect in significant but a priori unknowable ways. Here I develop recursive IAM frameworks to model uncertainty, learning, and concern for misspecification about damages. I decompose the carbon tax into channels capturing state uncertainty, insurance motives, and precautionary saving. Damage learning improves ex ante welfare by 750 billion USD. If damage functions are misspecified and omit the potential for catastrophic damages, robust control may be beneficial ex post.Citation
Rudik, Ivan. 2020. "Optimal Climate Policy When Damages Are Unknown." American Economic Journal: Economic Policy, 12 (2): 340–73. DOI: 10.1257/pol.20160541Additional Materials
JEL Classification
- H23 Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- Q54 Climate; Natural Disasters and Their Management; Global Warming
- Q58 Environmental Economics: Government Policy
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