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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

    We analyse the optimal design of climate change policies when a government wants to encourage the private sector to undertake significant immediate investment in developing cleaner technologies, but the relevant carbon taxes (or other environmental policies) that would incentivise such investment by firms will be set in the future. We assume that the current government cannot commit to long-term carbon taxes, and so both it and the private sector face the possibility that the government in power in the future may give different (relative) weight to environmental damage costs. We show that this lack of commitment has a significant asymmetric effect: it increases the incentive of the current government to have the investment undertaken, but reduces the incentive of the private sector to invest. Consequently the current government may need to use additional policy instruments – such as R&D subsidies – to stimulate the required investment.

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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 201104.

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    Date of creation: 15 Aug 2011
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    Handle: RePEc:san:wpecon:1104

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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," Discussion Papers dp-00-47, Resources For the Future.
    2. Lisandro Abrego & Carlo Perroni, . "Investment Subsidies and Time-Consistent Environmental Policy," EPRU Working Paper Series 99-19, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    3. Dieter Helm & Cameron Hepburn & Richard Mash, 2003. "Credible Carbon Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 19(3), pages 438-450.
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    Cited by:
    1. Hoel, Michael, 2012. "Second-best Climate Policy," Memorandum 04/2012, Oslo University, Department of Economics.
    2. Haradhan Kumar Mohajan, 2011. "Optimal Environmental Taxes Due to Health Effect," KASBIT Journal of Management & Social Science, Khadim Ali Shah Bukhari Institute of Technology (KASBIT), vol. 4, pages 1-19, December.
    3. Alistair Ulph & David Ulph, 2013. "Optimal Climate Change Policies When Governments Cannot Commit," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 56(2), pages 161-176, October.

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