Pareto-Improving Carbon-Risk Taxation

37 Pages Posted: 6 Apr 2020 Last revised: 22 Jul 2023

See all articles by Laurence J. Kotlikoff

Laurence J. Kotlikoff

Boston University - Department of Economics; National Bureau of Economic Research (NBER); Gaidar Institute for Economic Policy

Felix Kubler

University of Zurich

Andrey Vladimirovitch Polbin

Russian Academy of National Economy and Public Administration under the President of the Russian Federation (RANEPA); Gaidar Institute for Economic Policy

Simon Scheidegger

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Date Written: April 2020

Abstract

Anthropogenic climate change produces two conceptually distinct negative economic externalities. The first is an expected path of climate damage. The second, which is this paper's focus, is an expected path of economic risk. To isolate the climate-risk problem, we consider mean-zero, symmetric shocks in our 12-period, overlapping generations model. These shocks impact dirty energy usage (carbon emissions), the relationship between carbon concentration and temperature, and the connection between temperature and damages. Our model exhibits a de minimis climate problem absent its shocks. But due to non-linearities, symmetric shocks deliver negatively skewed impacts, including the potential for climate disasters. As we show, Pareto-improving carbon taxation can dramatically lower climate risk, in general, and disaster risk, in particular. The associated climate-risk tax, which is focused exclusively on limiting climate risk, can be as large or larger than the carbon average-damage tax, which is focused exclusively on limiting average damage.

Suggested Citation

Kotlikoff, Laurence J. and Kubler, Felix and Polbin, Andrey Vladimirovitch and Scheidegger, Simon, Pareto-Improving Carbon-Risk Taxation (April 2020). NBER Working Paper No. w26919, Available at SSRN: https://ssrn.com/abstract=3569383

Laurence J. Kotlikoff (Contact Author)

Boston University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Gaidar Institute for Economic Policy

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Felix Kubler

University of Zurich ( email )

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Switzerland

Andrey Vladimirovitch Polbin

Russian Academy of National Economy and Public Administration under the President of the Russian Federation (RANEPA) ( email )

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Russia

Gaidar Institute for Economic Policy ( email )

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Simon Scheidegger

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

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