Efficient carbon pricing under uncertainty

Christian Gollier, 06 April 2021

Any global temperature target must be translated into an intertemporal carbon budget and an associated cost-efficient carbon price schedule. This column uses an intertemporal asset-pricing approach to examine the impact of uncertainties surrounding economic growth and abatement technologies on the dynamics of efficient carbon prices. It finds evidence of a positive carbon risk premium and suggests an efficient growth rate of expected carbon prices of around 4% plus inflation. This is lower than the growth rates found in many public reports and integrated assessment models, and justifies a higher carbon price today in order to satisfy the carbon budget.

Joint design of emission tax and trading systems

Bernard Caillaud, Gabrielle Demange, 06 October 2015

The standard economic argument in favour of a uniform carbon price is efficiency – all agents face the same marginal cost of pollution. Such a price can be achieved either by an emissions trading (cap-and-trade) system or by imposing a tax. This column argues that whether a uniform policy or a mixture of both is optimal depends on a few factors, and most importantly on the nature of stochastic shocks affecting the economy.

When carbon is priced, who ultimately pays?

Charles Kolstad, Corbett Grainger, 29 August 2009

Opponents of US climate change legislation voice concerns about its effect on consumers in coal-reliant states, industries’ competitiveness, and regressive distributional consequences. This column argues that these concerns are either unfounded or have been addressed fairly. It says the conflict is more about ideology than distributional issues.

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