Polluting resource extraction and climate risk
Using a fossil fuel extraction model that treats the atmosphere as a depletable resource, we study the optimal price of carbon in the presence of endogenous uncertainty around a climatic regime shift. We find that the optimal carbon tax should account an uncertainty-adjusted cost term associated wit...
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| Format: | article |
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2022
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| Online Access: | http://hdl.handle.net/10725/17324 https://doi.org/10.1111/nrm.12354 http://libraries.lau.edu.lb/research/laur/terms-of-use/articles.php https://onlinelibrary.wiley.com/doi/full/10.1111/nrm.12354 |
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| Summary: | Using a fossil fuel extraction model that treats the atmosphere as a depletable resource, we study the optimal price of carbon in the presence of endogenous uncertainty around a climatic regime shift. We find that the optimal carbon tax should account an uncertainty-adjusted cost term associated with the environment's scarcity. This term is shown to be sensitive to the natural sequestration rate of the atmosphere and to the probability surrounding a climate tail event. Our analysis also shows that in the presence of uncertainty, the shadow price of the environment should grow at a faster rate. Lastly, compared to the endogenous uncertainty case, we find that if the probability surrounding a regime shift is exogenously given, this shadow price should even grow at a higher rate. |
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