SECOND-BEST RENEWABLE SUBSIDIES TO DE-CARBONIZE THE ECONOMY: COMMITMENT AND THE GREEN PARADOX

Frederick (Rick) van der Ploeg and Armon Rezai

No 168, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

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 °C, under second best without commitment 3.5°C, and without any policy 5.1°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%.

Keywords: first best; second best; commitment; Markov-perfect; Ramsey growth; carbon tax; renewables subsidy; learning by doing; directed technical change (search for similar items in EconPapers)
JEL-codes: H21 Q51 Q54 (search for similar items in EconPapers)
Date: 2016-01-25
New Economics Papers: this item is included in nep-ene, nep-env, nep-pr~ and nep-res
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Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Second-Best Renewable Subsidies to De-carbonize the Economy: Commitment and the Green Paradox (2017)
Working Paper: Second-Best Renewable Subsidies to De-Carbonize the Economy: Commitment and the Green Paradox (2016)
Working Paper: Second-Best Renewable Subsidies to De-Carbonize the Economy: Commitment and the Green Paradox (2016)
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