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The Simple Arithmetic of Carbon Pricing and Stranded Assets

Author

Listed:
  • Rick Van der Ploeg
  • Armon Rezai
Abstract
A simple rule for the optimal global price of carbon is presented, which captures the geo-physical, economic, and ethical drivers of climate policy as well as the effect of uncertainty about future growth of consumption. There is also a discussion of the optimal carbon budget and the amount of unburnable carbon and stranded fossil fuel reserves and a back-on-the-envelope expression are given for calculating these. It is also shown how one can derive the end of the carbon era and peak warming. This simple arithmetic for determining climate policy is meant to complement the simulations of large-scale integrated assessment model, and to give analytical understanding of the key determinants of climate policy. The simple rules perform very well in a full integrated assessment model. It is also shown how to take account of a 2°C upper limit on global warming. Steady increases in energy efficiency do not affect the optimal price of carbon, but postpones the carbon-free era somewhat and if technical progress in renewables and economic growth are strong leads to substantially lower cumulative emissions and lower peak global warming.

Suggested Citation

  • Rick Van der Ploeg & Armon Rezai, 2017. "The Simple Arithmetic of Carbon Pricing and Stranded Assets," OxCarre Working Papers 197, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    • Handle: RePEc:oxf:oxcrwp:197
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    Cited by:

    1. Ansari, Dawud & Holz, Franziska, 2020. "Between stranded assets and green transformation: Fossil-fuel-producing developing countries towards 2055," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 130, pages 1-1.
    2. Moreaux, Michel & Amigues, Jean-Pierre & van der Meijden, Gerard & Withagen, Cees, 2024. "Carbon capture: Storage vs. Utilization," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).
    3. Vicknair, David & Tansey, Michael & O'Brien, Thomas E., 2022. "Measuring fossil fuel reserves: A simulation and review of the U.S. Securities and Exchange Commission approach," Resources Policy, Elsevier, vol. 79(C).
    4. Dawud Ansari & Franziska Holz & Hashem al-Kuhlani, 2019. "Energy, Climate, and Policy towards 2055: An Interdisciplinary Energy Outlook (DIW-REM Outlook)," DIW Berlin: Politikberatung kompakt, DIW Berlin, German Institute for Economic Research, volume 127, number pbk139.

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    More about this item

    Keywords

    social cost of carbon; climate ethics; prudence; carbon budget; peak warming; end of carbon era; stranded assets; simple rules; energy efficiency;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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