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David Pearce Lecture 2016

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Pricing Carbon: Lessons from Theory
Prof. Dr. Matti Liski,  Aalto University

Matti LiskiThe monetization of social costs arising from current emissions is essential for the determination of optimal policies on climate change mitigation. Environmental economists have made considerable progress in computing a price for carbon. The lecture puts emphasis on a few first principles that can structure and simplify the practical attempts to come up with numerical estimates to be used in policymaking. I show that carbon pricing can be conceptualized through a simple rule, in the spirit of Taylor rule in macroeconomics. The rule consolidates and clarifies a set of results, and provides a neutral language for striking a balance between competing views. I argue that the rule can be extended to include climate change “unknowns”, and that such unknowns are not necessarily detrimental to the traditional ways of thinking about the carbon price in the coming decades. Finally, the climate policy rule can also cover strategic interactions across space and time. The policy rule is detailed enough for a quantitative assessment of the optimal carbon price path and thus comparable with the computational approaches.

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