Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/328557 
Year of Publication: 
2022
Citation: 
[Journal:] Economies [ISSN:] 2227-7099 [Volume:] 10 [Issue:] 10 [Article No.:] 257 [Year:] 2022 [Pages:] 1-56
Publisher: 
MDPI, Basel
Abstract: 
In a Ramsey policy regime, heterogeneity in beliefs about the potential costs of climate change is shown to produce policy ambiguities that alter carbon prices and taxation. Three sources of ambiguity are considered: (i) the private sector is skeptical, with beliefs that are unknown to the government, (ii) private agents have pessimistic doubts about the model, or (iii) the policy authority itself does not trust the extant scientific climate model and fears the worst. These three sources of ambiguity give rise to four potential belief regimes characterized by differentials between the government's and the private sector's inter-temporal rates of substitutions, with implications for the prices of carbon and capital, framed in terms of distorted Arrow-Debreu pricing theory that establishes an equivalence between the optimal carbon tax and the permit price of an underlying asset-the government-imposed limit on emissions in economies with cap and trade. This paper shows that in most instances, skeptical beliefs and resulting ambiguities justify higher carbon taxes and lower capital taxes to offset the private sector's increased myopia compared with rational expectations. Conversely, ambiguities created by worst-case fears in either the private sector or in government tend produce forces in the opposite direction.
Subjects: 
ambiguity premium
capital tax
carbon tax
dynamic stochastic integrated general equilibrium (DSIGE)
Knightian uncertainty
multiplier preferences
Ramsey planner
robust Arrow-Debreu asset prices
social planner
JEL: 
C61
C73
D80
E62
H21
H23
H63
Q32
Q38
Q54
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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