Making carbon taxation a generational win win

Abstract

Carbon taxation is mostly studied in social planner or infinitely lived-agent models, which obscure carbon taxation’s potential to produce a generational win win. This article’s large-scale, dynamic 55-period, overlap- ping generations model calculates the carbon tax policy delivering the highest uniform welfare gain to all current and future generations. Our model features coal, oil, and gas, increasing extraction costs, clean energy, technical and demographic change, and Nordhaus’ carbon/temperature/damage functions. Assuming high-end carbon damages, the optimal carbon tax is $70, rising annually at 1.5%. This policy raises all generations’ welfare by almost 5%. However, doing so requires major intergenerational redistribution.