ON THE OPTIMUM TREND OF FOSSIL-FUEL TAXATION

The interest rate should fall with global warming. Remedial policy sho uld 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 emissi ons. It is negative. If implemented, it would reduce fossil fuel deple tion, and raise the rates of interest and growth to the values they wo uld have had without global warming. The case for a falling fossil fue l tax is reinforced by the possibilities of future emission abatement, and learning about the damage emissions cause.