Skip to main content

Thank you for visiting nature.com. You are using a browser version with limited support for CSS. To obtain the best experience, we recommend you use a more up to date browser (or turn off compatibility mode in Internet Explorer). In the meantime, to ensure continued support, we are displaying the site without styles and JavaScript.

Environmental economics

Optimal carbon tax doubled

Nature Climate Change volume 4, pages 534–535 (2014)Cite this article

Subjects

Cost–benefit analysis and risk assessment approaches inform global climate change mitigation policy-making processes. Now, a development in the former shows that optimal carbon tax levels have previously been underestimated by a factor of two.

In CBA, optimal carbon taxes are derived by maximizing economic consumption over time, taking into account the combined effects of taxation and climate change damages. This insight arises from recent developments in finance that separate consumers' preferences about time and risk: Crost and Traeger call this a 'disentangled' approach2. Previously, CBA has mainly relied on the assumption that consumers are just as concerned about short-term fluctuations in consumption as they are about the risk of future consumption loss. In fact, observed market data do not support this assumption3. The data show that consumers prefer to sacrifice consumption in one period to get it back with certainty later, rather than gamble over whether the future has greater or smaller consumption. In other words, the new approach “distinguishes risk aversion from the desire to smooth consumption over time”2 — a concept traditionally expressed as a single parameter known as the elasticity of the marginal utility of consumption. The authors' approach better fits market observations than the traditional one.

This is a preview of subscription content

Access options

Rent or Buy article

Get time limited or full article access on ReadCube.

from$8.99

Rent or Buy

All prices are NET prices.

Figure 1: A global perspective on climate-related risks.

References

  1. 1

    Oppenheimer, M. et al. in Climate change 2014: Impacts, Adaptation and Vulnerability (eds Field, C. B. et al.) Ch. 19 (IPCC, Cambridge Univ. Press, 2014).

    Google Scholar 

  2. 2

    Crost, B. & Traeger, C. P. Nature Clim. Change 4, 631–636 (2014).

    CAS  Article  Google Scholar 

  3. 3

    Vissing-Joergensen, A. & Attanasio, O. P. Am. Econ. Rev. 93, 383–391 (2013).

    Article  Google Scholar 

  4. 4

    Nordhaus, W. D. A Question of Balance: Economic Modelling of Global Warming (Yale Univ. Press, 2008).

    Google Scholar 

  5. 5

    Kopp, R. E., Golub, A., Keohane, N. O. & Onda, C. Economics J. 6, 1–40 (2012).

    Google Scholar 

  6. 6

    Mastrandrea, M. D. & Schneider S. H. Science 304, 571–575 (2004).

    CAS  Article  Google Scholar 

  7. 7

    Pycroft, J., Vergano, L., Hope, C. W., Paci, D. & Ciscar, J. C. Economics J. 5, 1–29 (2011).

    Google Scholar 

  8. 8

    Dietz, S. Climatic Change 108, 519–541 (2011).

    Article  Google Scholar 

  9. 9

    Revesz, R. L. et al. Nature 508, 173–176 (2014).

    Article  Google Scholar 

  10. 10

    Wietzman, M. L. Rev. Econ. Stat. 1, 1–19 (2009).

    Article  Google Scholar 

  11. 11

    Wietzman, M. L. Rev. Env. Econ. Policy 5, 275–292 (2011).

    Article  Google Scholar 

  12. 12

    Ackerman, F., Stanton, E. A. & Bueno, R. Environ. Res. Econ. 56, 73–84 (2013).

    Article  Google Scholar 

  13. 13

    Wietzman, M. L. Environ. Econ. Management 36, 201–208 (1998).

    Article  Google Scholar 

  14. 14

    IPCC Summary for Policymakers. in Climate Change 2014: Impacts, Adaptation, and Vulnerability. Part A: Global and Sectoral Aspect (eds Field, C. B et al.) 1–32 (Cambridge Univ. Press, 2014).

Download references

Author information

Affiliations

  1. Rachel Warren is at the Tyndall Centre for Climate Change Research, School of Environmental Sciences, University of East Anglia, University Plain, Norwich NR4 7TJ, UK

    Rachel Warren

Authors
  1. Rachel Warren
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Rachel Warren.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Warren, R. Optimal carbon tax doubled. Nature Clim Change 4, 534–535 (2014). https://doi.org/10.1038/nclimate2288

Download citation

Search

Advanced search

Quick links

Nature Briefing

Sign up for the Nature Briefing newsletter — what matters in science, free to your inbox daily.

Get the most important science stories of the day, free in your inbox. Sign up for Nature Briefing