| Institution: | 1. Department of Economics, Concordia University, Montreal, Quebec, Canada
Contribution: Conceptualization (equal), Formal analysis (equal), Investigation (equal), Methodology (equal), Project administration (equal), Resources (equal), Validation (equal), Writing - original draft (equal), Writing - review & editing (equal);2. Department of Economics, Lebanese American University, Beirut, Lebanon |
| Abstract: | Using a fossil fuel extraction model that treats the atmosphere as a depletable resource, we study the optimal price of carbon in the presence of endogenous uncertainty around a climatic regime shift. We find that the optimal carbon tax should account an uncertainty-adjusted cost term associated with the environment's scarcity. This term is shown to be sensitive to the natural sequestration rate of the atmosphere and to the probability surrounding a climate tail event. Our analysis also shows that in the presence of uncertainty, the shadow price of the environment should grow at a faster rate. Lastly, compared to the endogenous uncertainty case, we find that if the probability surrounding a regime shift is exogenously given, this shadow price should even grow at a higher rate. |
