The seminar will be held in the Visitor Centre at 3:15 pm.
John Hassler (IIES, Sweden)
Abstract
Convincing evidence now exists for the hypothesis that economic activity, in particular burning of fossil fuels, affect the long run development of the earth's climate. We embed a simple linear model of the coal circulation into a standard neoclassical growth model where one input to the production function, oil, is non-renewable. The use of oil creates coal emissions that enter into the coal-circulation model. Changes in the amount of coal in the atmosphere drives the greenhouse effect and thereby the climate. Climate change is modelled as a global damage to production and is a pure externality. We solve the model for both the decentralized equilibrium with taxes on oil and the optimal planner allocation. We also include endogenous technological change. The model is used to find optimal tax and subsidy polices. In a simplified version of the model, closed form solution for optimal taxes are found. . A key finding is that optimal ad valorem taxes on oil consumption should fall over time. In the simplified version of the model, optimal taxes per unit of oil should be indexed to GDP. In coming work, we plan to verified these findings in a more realistic model solved with recursive numerical methods.