Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/331339 
Year of Publication: 
2025
Series/Report no.: 
Tinbergen Institute Discussion Paper No. TI 2025-043/VI
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
Climate change and its two-way relation with economic activity is stochastic and so is therefore the optimal tax internalizing the climate externality. But with capital irreversibility a stochastic time path for carbon prices slows down the reallocation from brown to green sectors because waiting then acquires an option value. We show that it is optimal to pre-announce a time path for future carbon taxes, eliminating the option value of waiting at the cost of suboptimality of the pre-announced taxes at the time they apply. We analyse for how long carbon taxes should be pre-announced and which factors influence that timespan.
Subjects: 
Carbon taxes
Social Cost of Carbon
Irreversible Capital
Real Options
JEL: 
G13
H2
Q51
Q54
Document Type: 
Working Paper

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