TITLE:
Modified Ramsey Rule, Optimal Carbon Tax and Economic Growth
AUTHORS:
Morio Kuninori, Masayuki Otaki
KEYWORDS:
Modified Ramsey Rule, Social Discount Rate, Optimal Carbon Tax, Negative Externality by the Emissions of CO2
JOURNAL NAME:
Atmospheric and Climate Sciences,
Vol.6 No.2,
April
8,
2016
ABSTRACT: In contrast to the overlapping-generations
model, it is allowable to discount the future utility in a dynasty model
without the ethical difficulty related to intergenerational conflicts. Much
precedent research uses Ramsey-type optimal growth theory in order to estimate the
social discount rate. However, one must note that almost all the formulations
neglect the existence of negative intertemporal externalities. This problem is
vital when one analyzes the global warming problem mainly caused by the excess
concentration of carbon dioxide (CO2). This is because an adjoining
effect of capital accumulation exists besides the improvement of product
capacity, which is reflected in the rate of interest (or equivalently, the marginal
productivity of capital). That is, one cannot neglect a negative externality to
the future productivity that originates from the excess emissions of CO2.
Accordingly, following the optimal growth theory, the effective social discount
rate should be heightened by a proportional carbon tax to suppress future
excess consumption/ emissions than in the case of the existing analyses, which
exclude such an intertemporal external diseconomy.