ON THE OPTIMUM TREND OF FOSSIL-FUEL TAXATION

The interest rate should fall with global warming. Remedial policy should allow for this endogeneity. In the simplest infinite-horizon model yielding a steady-state, one can derive the trend that an ad valorem fossil fuel tax should take to internalize the externality from emissions. It is negative. If implemented, it would reduce fossil fuel depletion, and raise the rates of interest and growth to the values they would have had without global warming. The case for a falling fossil fuel tax is reinforced by the possibilities of future emission abatement, and learning about the damage emissions cause.