Carbon pricing, carbon sequestration and social discounting

This paper studies the optimal taxation of carbon emissions in a dynastic economy. When the welfare function places direct Pareto weights on unborn generations, the social discount rate is lower than the discount rate of the current generation. I show that this welfare criterion has important consequences for the structure of the optimal regulatory system. In particular, I show that: (i) the optimal carbon tax does not in general equal the social cost of carbon; (ii) a subsidy on oil reserves is sometimes optimal; and (iii) carbon trading programs should limit the award of carbon offset allowances