Discussion Paper

No. 2012-37 | August 14, 2012
The Rate of Change of the Social Cost of Carbon and the Social Planner’s Hotelling Rule
(Published in Special Issue The Social Cost of Carbon)


This paper derives the social cost of carbon (SCC) and its rate of change. It does so in a deterministic Ramsey model of optimal economic growth with carbon emissions from burning fossil fuels. It is shown that the determinants of the rate of change of the SCC are substantially almost identical to the determinants in the social planner’s Hotelling rule if a unit of fossil fuel use leads to exactly one unit of carbon emission, while otherwise these formulas differ substantially. As is also shown in this paper, in the special case in which the two formulas are substantially almost identical, a Pigovian tax on fossil fuel use and a Pigovian tax on carbon emissions are both equal to the SCC, while otherwise only a Pigovian tax on carbon emissions equals the SCC.

JEL Classification:

D61, Q54


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Cite As

Tomas Kögel (2012). The Rate of Change of the Social Cost of Carbon and the Social Planner’s Hotelling Rule. Economics Discussion Papers, No 2012-37, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2012-37

Comments and Questions

Anonymous - Approval with suggestions
August 15, 2012 - 19:25

The paper is an excellent contribution to the study of Social Cost of Carbon. Its application of full equilibrium models is makes important points about how the problem of carbon emission may be tackled globally. It is, however, important that the diversity of the carbon damage be assessed or at ...[more]

... least acknowledged. Current carbon emission control discourse is fast moving towards a polarized world where richer countries especially those in the industrial North America are increasingly factoring in carbon emission as a means of maintaining an edge over other more vulnerable economies in the less resource endowed parts of the world. Ignoring these novel changes in perspectives belies an important issue of whether Pigouvian taxes would progressive apportion well being.

Anonymous - report
September 26, 2012 - 12:21

The paper just presents a (sensible) model of climate change and derives the necessary conditions for the first best. This is standard. Then it basically gives an economic interpretation of these necessary conditions, which, by now, is standard as well. Finally it derives optimal taxes that should prevail in a ...[more]

... market economy. Results are given only in terms of endogenous variables. For example, proposition 1 derives the change in the social cost of carbon as a function of other endogenous variables. Interesting questions, such as what happens with the carbon tax if something specific changes in the production function (e.g. a higher elasticity of output with respect to temperature), are not addressed.

Anonymous - report
September 26, 2012 - 13:18

see attached file

Anonymous - Referee Report 3
October 12, 2012 - 09:50

See attached file

Tomas Koegel - Reply to the referees’ reports
October 13, 2012 - 20:06

see attached file

Anonymous - Co-editor´s evaluation
October 18, 2012 - 08:47

see attached file