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Christian-Albrechts-Universität zu Kiel

Institut für Volkswirtschaftslehre - Department of Economics
Economics Working Papers

Economics Working Papers: Abstract 2016-09


Nummer

2016-09

Autoren

Martin F. Quaas, Johannes Bröcker

 

Titel

 

Substitutability and the Social Cost of Carbon in a Solvable Growth Model with Irreversible Climate Change
Abstract We develop an overlapping generations endogenous growth model with stocks of produced capital, human capital, a non-renewable resource, and irreversibly accumulated greenhouse gases in deterministic and stochastic versions. The model allows for analyzing different elasticities of substitution. We present a full analytical solution and characterization of the transition dynamics. We show that, as a rule of thumb, the social cost of carbon grow at a rate equal to the economy's growth rate divided by the elasticity of substitution. We analytically study sensitivity of the social cost of carbon with respect to key parameters: the intergenerational discount rate, the elasticity of substitution, and climate uncertainty. We show that the social cost of carbon explode at a finite level of log-normally distributed climate uncertainty. We illustrate results in a calibrated version of the model.

Keywords: overlapping generations, substitutes vs. complements, stochastic resource dynamics, optimum growth, climate policy

JEL classification: Q54, O44, Q32

 

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