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Informationally Efficient Climate Policy: Designing Markets to Measure and Price Externalities

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  • Derek Lemoine

Abstract

I study how policymakers can access and act on the information about climate change damages that is dispersed throughout the economy. I analyze a new dynamic deposit-refund instrument (called “carbon shares”). I show that there exists a limit-case rational expectations equilibrium in which it: i) efficiently prices emissions conditional on information, ii) efficiently incentivizes removal of past emissions conditional on information, and iii) efficiently aggregates dispersed information about the social cost of emissions. Conventional emission taxes generally succeed at only the first of these objectives. Rather than projecting damages in all future periods and all possible states of the world in order to calculate the optimal tax, the regulator here estimates damages as they are realized and empowers markets to perform price discovery about future damages.

Suggested Citation

  • Derek Lemoine, 2022. "Informationally Efficient Climate Policy: Designing Markets to Measure and Price Externalities," NBER Working Papers 30535, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30535
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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