Taxation of Carbon Emissions and Local Air Pollution in Intertemporal Optimization Frameworks with Social and Private Discount Rates

Current decarbonization policies neglect damages from local air pollutants. We devise a strategy to model those emissions’ damages in intertemporal optimization frameworks, resulting in optimal carbon and air pollution taxes above their marginal damages when private discount rates exceed social ones. We quantify results for the European power market until 2050. Taxing only carbon yields social cost of 794 billion € and promotes CCS deployment. Taxing only air pollution results in social cost of 2,091 billion € and fosters nuclear deployment. Taxing both reduces cost to 622 billion €. Wind and solar deployment is almost unaffected by taxation choices