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Optimal Climate Change Policies When Governments Cannot Commit

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  • Alistair Ulph
  • David Ulph
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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 investmen

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    Bibliographic Info

    Paper provided by Department of Economics, University of St. Andrews in its series Discussion Paper Series, Department of Economics with number 200909.

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    Date of creation: 15 Aug 2009
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    Handle: RePEc:san:wpecon:0909

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    Related research

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

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    1. Stavins, Robert & Jaffe, Adam & Newell, Richard, 2000. "Technological Change and the Environment," Working Paper Series rwp00-002, Harvard University, John F. Kennedy School of Government.
    2. Ulph, Alistair & Ulph, David, 1997. "Global Warming, Irreversibility and Learning," Economic Journal, Royal Economic Society, vol. 107(442), pages 636-50, May.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Climate change and non-committal governments
      by Economic Logician in Economic Logic on 2009-10-08 14:29:00
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    Cited by:
    1. Michael Hoel, 2010. "Climate Change and Carbon Tax Expectations," CESifo Working Paper Series 2966, CESifo Group Munich.
    2. 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.
    3. Nicholas Stern, 2009. "Imperfections in the Economics of Public Policy, Imperfections in Markets, and Climate Change," Working Papers 2009.106, Fondazione Eni Enrico Mattei.

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