On Current and Future Carbon Prices in a Risky World
Joint with Rick van der Ploeg and Sweder van Wijnbergen
R&R at Journal of Economic Dynamics and Control
Discounting the Future: On Climate Change, Ambiguity Aversion and Epstein-Zin Preferences
Joint with Sweder van Wijnbergen
The Social Cost of Carbon: Optimal Policy versus Business As Usual
Climate change is a global externality. This externality can be internalized by introducing a global carbon tax. The Pigouvian optimal carbon tax equals the social cost of carbon (SCC), which is the welfare loss of emitting one unit of carbon expressed in monetary units. Currently, global climate policy is however far from optimal and closer to the business as usual (or no policy) scenario. The SCC is dependent on the policy scenario. We develop a stochastic climate-economy model to investigate the difference between the SCC in the optimal and business as usual scenario. In a simplified setting, a closed form solution for the SCC is obtained. Then a more realistic model is solved to quantify the effects. Our results show that especially for convex specifications of the damage function, the social cost of carbon is considerably higher in the business as usual scenario. To solve our high-dimensional model, a novel least-squares solution method is introduced.
Solution methods for DSGE models in continuous time: Application to a climate-economy model
Debt sustainability when r-g<0: no free lunch after all
Joint with Nander de Vette and Sweder van Wijnbergen
Interest rates on public debt have for several years now fallen short of GDP growth rates in much of the Western world. In his presidential address to the AEA Blanchard argued that this implies that there are no fiscal costs to high debt (Blanchard, 2019). In this paper we argue that the safe rate is not the right interest rate to use for that comparison. We develop a General Equilibrium Asset Pricing model and econometrically estimate the relevant characteristics of the stochastic processes driving the primary surplus in relation to the growth rate of aggregate consumption and derive the proper risk premium. The resulting interest rate exceeds the growth rate. We then calculate the discounted value of future primary surpluses using the same stochastic process for the primary surplus and compare that to the market value of the (Dutch) public sector debt. We test various explanations for the gap between these two and derive the fiscal adjustment necessary to eliminate it (the “fiscal sustainability gap”).
Researcher at the CPB