Optimal policy for carbon pricing: Challenging the Hotelling rule and dissecting mitigation cost uncertainties

Abstract

In this thesis, we apply mathematical techniques to three topics in climate policy. First, we calculate the optimal time profile of carbon prices. From classical economic theory, the optimal carbon price path is shown to grow exponentially at the same rate as the discount rate. However, we show that under simple assumptions like learning-by-doing and inertia, this rule does not yield optimal price paths anymore. Second, we analyse the sensitivity of the amount of negative emissions in IAM scenarios to changes in the discount rate. In the third part, we create a simple IAM to calculate the cost as function of temperature goal, and analyse its uncertainty. We compare the literature uncertainties from geo-physical sources to the uncertainties from socio-economic modelling.