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Optimal Climate Change Policies When Governments Cannot Commit

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  • Ulph, Alistair
  • Ulph, David
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    Abstract

    This paper examines the optimal design of climate change policies in the context where governments want to encourage the private sector to undertake significant immediate investment in developing cleaner technologies, but the carbon taxes and other environmental policies that could in principle stimulate such investment will be imposed over a very long future. The conventional claim by environmental economists is that environmental policies alone are sufficient to induce firms to undertake optimal investment. However this argument requires governments to be able to commit to these future taxes, and it is far from clear that governments have this degree of commitment. We assume instead that governments cannot commit, and so both they and the private sector have to contemplate the possibility of there being governments in power in the future that give different (relative) weights to the environment. We show that this lack of commitment has a significant asymmetric effect. Compared to the situation where governments can commit it increases the incentive of the current government to have the investment undertaken, but reduces the incentive of the private sector to invest. Consequently governments may need to use additional policy instruments – such as R&D subsidies – to stimulate the required investment.

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    File URL: http://repo.sire.ac.uk/handle/10943/91
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    Bibliographic Info

    Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2009-42.

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    Date of creation: 2009
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    Handle: RePEc:edn:sirdps:91

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    Related research

    Keywords: Climate Change; Emissions Taxes; Impact on R&D; Timing and Commitment;

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    Cited by:
    1. Edenhofer, Ottmar & Hirth, Lion & Knopf, Brigitte & Pahle, Michael & Schlömer, Steffen & Schmid, Eva & Ueckerdt, Falko, 2013. "On the economics of renewable energy sources," Energy Economics, Elsevier, vol. 40(S1), pages S12-S23.
    2. Nicholas Stern, 2009. "Imperfections in the Economics of Public Policy, Imperfections in Markets, and Climate Change," Working Papers 2009.106, Fondazione Eni Enrico Mattei.
    3. Michael Hoel, 2010. "Climate Change and Carbon Tax Expectations," CESifo Working Paper Series 2966, CESifo Group Munich.

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