Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/327711 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 12101
Publisher: 
Munich Society for the Promotion of Economic Research - CESifo GmbH, Munich
Abstract: 
To study the economic and welfare consequences of alternative time paths towards net zero CO2e emissions, we develop a multi-sector dynamic computable general equilibrium model of an open economy with heterogeneity in abatement costs across sectors and firms and with adjustment costs in the adoption of abatement technologies and other types of investment. We measure the welfare costs of following the simple rules for emissions reduction observed in practice rather than the optimal national policy rule prescribed by economic theory. In an undistorted economy subject to a carbon budget, the theoretically optimal climate policy is a "Hotelling rule" where the carbon tax rate increases year by year at the real rate of interest. However, when some consumers are credit-constrained, it is optimal to deviate from the Hotelling rule and use carbon taxation to redistribute income towards poor hand-to-mouth consumers. Nevertheless, in aggregate terms very little welfare is lost by following a Hotelling rule or a linear emissions reduction path rather than the optimal time path for carbon taxes when climate policy is subject to a carbon budget. The optimal carbon tax path towards a simple end-point target for net zero emissions implies a much higher welfare cost per ton of accumulated GHG emissions than a policy constrained by a carbon budget.
Subjects: 
alternative climate policy rules
hotelling rule for optimal climate policy
computable general equilibrium
abatement costs
JEL: 
C67
C68
H21
H23
Q01
Document Type: 
Working Paper
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