A simple formula reveals the optimal carbon tax depends on current GDP
In short: Researchers using a dynamic stochastic general-equilibrium model found that the ideal tax on fossil fuel emissions can be calculated using a surprisingly simple formula. Their analysis shows that the economic damage caused by carbon emissions is proportional to current GDP, driven by only three specific factors rather than a complex web of future variables.
The study found that the optimal tax depends only on the discount rate, the expected damage elasticity, and the rate of carbon depreciation in the atmosphere. By using this model, the researchers observed that coal poses a greater threat to economic welfare than oil due to its abundance, though the results remain sensitive to assumptions about technological progress and energy substitution.
Because this study relies on a theoretical economic model, the findings represent a mathematical framework for policy rather than an empirical observation of real-world tax impacts.
Why it matters: The complexity of future economic variables may be stripped away when calculating the ideal carbon tax.
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Sources
- Summary by Intellect · source: Research: Golosov et al. (2014). Optimal Taxes on Fossil Fuel in General Equilibrium. Econometrica.
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