Carbon Taxes and Renewable Energy Subsidies: A Discussion About . . .
117
The goal is not merely to cut emissions to zero. Emissions come from the production of consumption goods, and consumption is good for the economy. Societies
that enjoy higher consumption are happier and wealthier. Thus, the optimal policy
is to pollute at the optimal level that maximizes social well-being.
Integrated Assessment Models
It is useful to consider a global economy to think about this problem. Economics
has developed a toolbox to study how the economy and the climate interact and, in
particular, what the optimal carbon emissions tax is. Nordhaus and Boyer (2003)
pioneered this research agenda, and there is now a burgeoning literature on this field
(see Golosov et al. 2014; Acemoglu et al. 2012; Stern 2008; Barrage 2018, among
others).
The building block in the analysis is an integrated assessment model. The name
reflects the blend between an economic model and a climate model at the intersection
of economics, physics and chemistry. Typically, the economic model is a version of
a neoclassical growth model extended to include fossil fuels, a climate externality
associated with the use of fossil fuels and a carbon cycle that determines how carbon
in the atmosphere evolves and translates into a global temperature increase.
In the simplest of these models, a single consumption good is produced with
renewable and non-renewable energy. The non-renewable energy source is oil. World
oil reserves are draining as oil is used up for production. Renewable energy, such as
solar or wind, is clean. Its technology relies on labor only.
There is a climate system embedded in the model to address climate change.
The first component of this system is atmospheric carbon. Carbon increases with oil
extraction. Scientific research reports that emissions remain in the atmosphere for a
long time, and there is a low rate of natural carbon depreciation or reabsorption.
Twenty per cent of the emissions stay in the atmosphere forever. The remaining
eighty per cent of these emissions has an average life of 300 years (Archer 2005). This
means that, even though there is a natural reabsorption of human-induced pollution,
it happens at a meager rate.
The last element that completes an integrated assessment model has to do with
the presence of carbon in the atmosphere and how it becomes a cost to the economy.
There are two common ways of adding this cost: as an output loss or a welfare loss.
Nordhaus estimates that if the economy reaches a global temperature increase of
2.5–3
◦ C above the average temperature in the pre-industrial era, the world output
loss will amount to approximately 0.48%. If global temperature increases further,
the losses could be much higher due to the nonlinearities in the system that lead to
catastrophic economic scenarios.
At this point, it is convenient to set up a model to investigate further on these
issues. The non-technical reader may wish to skim through the technical details that
follow.
117
The goal is not merely to cut emissions to zero. Emissions come from the production of consumption goods, and consumption is good for the economy. Societies
that enjoy higher consumption are happier and wealthier. Thus, the optimal policy
is to pollute at the optimal level that maximizes social well-being.
Integrated Assessment Models
It is useful to consider a global economy to think about this problem. Economics
has developed a toolbox to study how the economy and the climate interact and, in
particular, what the optimal carbon emissions tax is. Nordhaus and Boyer (2003)
pioneered this research agenda, and there is now a burgeoning literature on this field
(see Golosov et al. 2014; Acemoglu et al. 2012; Stern 2008; Barrage 2018, among
others).
The building block in the analysis is an integrated assessment model. The name
reflects the blend between an economic model and a climate model at the intersection
of economics, physics and chemistry. Typically, the economic model is a version of
a neoclassical growth model extended to include fossil fuels, a climate externality
associated with the use of fossil fuels and a carbon cycle that determines how carbon
in the atmosphere evolves and translates into a global temperature increase.
In the simplest of these models, a single consumption good is produced with
renewable and non-renewable energy. The non-renewable energy source is oil. World
oil reserves are draining as oil is used up for production. Renewable energy, such as
solar or wind, is clean. Its technology relies on labor only.
There is a climate system embedded in the model to address climate change.
The first component of this system is atmospheric carbon. Carbon increases with oil
extraction. Scientific research reports that emissions remain in the atmosphere for a
long time, and there is a low rate of natural carbon depreciation or reabsorption.
Twenty per cent of the emissions stay in the atmosphere forever. The remaining
eighty per cent of these emissions has an average life of 300 years (Archer 2005). This
means that, even though there is a natural reabsorption of human-induced pollution,
it happens at a meager rate.
The last element that completes an integrated assessment model has to do with
the presence of carbon in the atmosphere and how it becomes a cost to the economy.
There are two common ways of adding this cost: as an output loss or a welfare loss.
Nordhaus estimates that if the economy reaches a global temperature increase of
2.5–3
◦ C above the average temperature in the pre-industrial era, the world output
loss will amount to approximately 0.48%. If global temperature increases further,
the losses could be much higher due to the nonlinearities in the system that lead to
catastrophic economic scenarios.
At this point, it is convenient to set up a model to investigate further on these
issues. The non-technical reader may wish to skim through the technical details that
follow.