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Second-Best Renewable Subsidies to De-carbonize the Economy: Commitment and the Green Paradox

Listed author(s):
  • Armon Rezai

    ()

    (Vienna University of Economics and Business
    IIASA
    WIIW)

  • Frederick Ploeg

    ()

    (Oxford University
    State University of St. Petersburg
    VU University Amsterdam)

Abstract Climate change must deal with two market failures: global warming and learning by doing in renewable energy production. The first-best policy consists of an aggressive renewables subsidy in the near term and a gradually rising and falling carbon tax. Given that global carbon taxes remain elusive, policy makers might have to rely on a second-best subsidy only. With credible commitment the second-best subsidy is higher than the social benefit of learning to cut the transition time and peak warming close to first-best levels at the cost of higher fossil fuel use in the short run (weak Green Paradox). Without commitment the second-best subsidy is set to the social benefit of learning. It generates smaller weak Green Paradox effects, but the transition to the carbon-free takes longer and cumulative carbon emissions are higher. Under first best and second best with pre-commitment peak warming is 2.1–2.3 $$^{\circ }$$ ∘ C, under second best without commitment 3.5 $$^{\circ }$$ ∘ C, and without any policy 5.1 $$^{\circ }$$ ∘ C above pre-industrial levels. Not being able to commit yields a welfare loss of 95% of initial GDP compared to first best. Being able to commit brings this figure down to 7%.

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File URL: http://link.springer.com/10.1007/s10640-016-0086-3
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Article provided by Springer & European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

Volume (Year): 66 (2017)
Issue (Month): 3 (March)
Pages: 409-434

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Handle: RePEc:kap:enreec:v:66:y:2017:i:3:d:10.1007_s10640-016-0086-3
DOI: 10.1007/s10640-016-0086-3
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