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Time Inconsistent Environmental Policy and Optimal Delegation

Listed author(s):
  • Dieter Helm
  • Cameron Hepburn
  • Richard Mash

Time consistency problems can arise when environmental taxes are employed to encourage firms to take irreversible abatement decisions. Setting a high carbon tax, for instance, would induce firms to invest in low-carbon technology, yet once investment has occurred the government can then reduce the carbon tax to better achieve other objectives; lower energy prices, redistribution, and electoral success. The resulting time inconsistency discourages firms from investing in the first place. We propose an institutional solution to this problem, adapted from the monetary policy literature; the commitment outcome can be achieved through delegation to an `environmental policymaker`, akin to a conservative central banker.

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File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper175.pdf
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 175.

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Date of creation: 01 Oct 2003
Handle: RePEc:oxf:wpaper:175
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  1. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
  2. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-167, March.
  3. Lisandro Abrego & Carlo Perroni, "undated". "Investment Subsidies and Time-Consistent Environmental Policy," EPRU Working Paper Series 99-19, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
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  9. Poterba, J.M., 1989. "Lifetime Incidence And The Distributional Burden Of Excise Taxes," Working papers 510, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Metcalf, Gilbert E., 1999. "A Distributional Analysis of Green Tax Reforms," National Tax Journal, National Tax Association, vol. 52(n. 4), pages 655-82, December.
  11. Dieter Helm & Cameron Hepburn & Richard Mash, 2003. "Credible Carbon Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 19(3), pages 438-450.
  12. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March.
  13. Browning, Edgar K, 1976. "The Marginal Cost of Public Funds," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 283-298, April.
  14. Marsiliani, Laura & Renstrom, Thomas I, 2000. "Time Inconsistency in Environmental Policy: Tax Earmarking as a Commitment Solution," Economic Journal, Royal Economic Society, vol. 110(462), pages 123-138, March.
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  17. Gersbach, Hans & Glazer, Amihai, 1998. "Markets and regulatory hold-up problems," University of California Transportation Center, Working Papers qt9gf9t35g, University of California Transportation Center.
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