Steering the Climate System: Using Inertia to Lower the Cost of Policy∗

Conventional wisdom holds that the efficient way to achieve a climate target is to price carbon emissions at a rate that increases exponentially. We show that an exponentially increasing tax on carbon emissions is not efficient when climate targets are expressed in terms of temperature. In that case, the least-cost policy path deviates from an exponential trajectory in order to take advantage of the climate system’s inertia. Carbon dioxide temporarily overshoots the steady-state level consistent with the temperature limit, and the efficient carbon price follows an inverse-U-shaped path. We find that a policy to limit warming to 2◦C can be 2–9 times cheaper (and the initial carbon price can be 90% smaller) than implied by the conventionally assumed exponential policy path. Integrated assessment models that assume exponentially increasing carbon prices may be overestimating the minimum cost of achieving a temperature target by billions of dollars.