Abstract
The optimal transition to a low-carbon economy must account for adjustment costs in switching from dirty to clean capital, economic and climatic shocks, and clean technological progress. Using a dynamic stochastic general equilibrium model with emissions abatement costs calibrated on a large energy modelling database and solved with recursive methods, we estimate a net premium of 17% on the optimal carbon price today relative to a `straw man' model with perfect capital mobility, fixed abatement costs and no uncertainty. The optimal path involves rapid emissions reductions and a best estimate of US$2.7 trillion of cumulative disinvestment in dirty capital. Another reason to price carbon at a high level today is to avoid climate damages in the short to medium run. These are ignored if the planning problem is construed as one of meeting a temperature constraint at minimum discounted abatement cost, which typifies contemporary climate policy discussions.