TY - JOUR
AU - Golosov, Mikhail
AU - Hassler, John
AU - Krusell, Per
AU - Tsyvinski, Aleh
TI - Optimal Taxes on Fossil Fuel in General Equilibrium
JF - National Bureau of Economic Research Working Paper Series
VL - No. 17348
PY - 2011
Y2 - August 2011
DO - 10.3386/w17348
UR - http://www.nber.org/papers/w17348
L1 - http://www.nber.org/papers/w17348.pdf
N1 - Author contact info:
Mikhail Golosov
Department of Economics
University of Chicago
1126 E. 59th Street
Chicago, IL 60637
Tel: 773/702-6405
E-Mail: golosov@uchicago.edu
John Hassler
Institute for International Economic Studies
Stockholm University
E-Mail: John.Hassler@iies.su.se
Per Krusell
Institute for International Economic Studies
Stockholm University
106 91 STOCKHOLM
SWEDEN
E-Mail: per.krusell@iies.su.se
Aleh Tsyvinski
Department of Economics
Yale University
Box 208268
New Haven, CT 06520-8268
E-Mail: a.tsyvinski@yale.edu
AB - We analyze a dynamic stochastic general-equilibrium (DSGE) model with an externality through climate change from using fossil energy. A central result of our paper is an analytical derivation of a simple formula for the marginal externality damage of emissions. This formula, which holds under quite plausible assumptions, reveals that the damage is proportional to current GDP, with the proportion depending only on three factors: (i) discounting, (ii) the expected damage elasticity (how many percent of the output flow is lost from an extra unit of carbon in the atmosphere), and (iii) the structure of carbon depreciation in the atmosphere. Very importantly, future values of output, consumption, and the atmospheric CO2 concentration, as well as the paths of technology and population, and so on, all disappear from the formula. The optimal tax, using a standard Pigou argument, is then equal to this marginal externality. The simplicity of the formula allows the optimal tax to be easily parameterized and computed. Based on parameter estimates that rely on updated natural-science studies, we find that the optimal tax should be a bit higher than the median, or most well-known, estimates in the literature. We also show how the optimal taxes depend on the expectations and the possible resolution of the uncertainty regarding future damages. Finally, we compute the optimal and market paths for the use of energy and the corresponding climate change.
ER -