What is it about?
This paper is about how optimal policy is altered when the private sector harbors doubts and skepticism about climate science. In a rational world, the formulation of an optimal climate policy must be conditioned on private beliefs that determine consumption and investment decisions, including the use of energy. But since private beliefs are subjective and can be arbitrary, the government cannot know private beliefs, nor does it know their distributions. The paper describes how the resulting Knightian uncertainty and ambiguity alter policy, often leading to higher carbon taxes and lower capital taxes.
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Why is it important?
The greatest obstacle to effective and coherent climate mitigation is the high level of doubt and even disbelief in the public about the validity of climate science and its policy implications. An important consequence is that subjective doubts give rise to ambiguities that will affect policy. In most cases, doubt and skepticism in the public mind justify raising the price of or the tax on carbon.
Perspectives
It has been frustrating to observe the painfully slow progress being made around the world in mitigating atmospheric carbon build-up, which if not stopped soon, will doom humanity. The planet will survive, but we humans may not, A big obstacle to effective policy has been and continues to be well documented skepticism that climate scientists are correct in their assessments.
Peter von zur Muehlen
Federal Reserve Board
Read the Original
This page is a summary of: Prices and Taxes in a Ramsey Climate Policy Model under Heterogeneous Beliefs and Ambiguity, Economies, October 2022, MDPI AG,
DOI: 10.3390/economies10100257.
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