Time Inconsistent Environmental Policy and Optimal Delegation

Richard Mash (), Dieter Helm and Cameron J. Hepburn ()

No 175, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: 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.

Keywords: Time Inconsistency; Environmental Taxation; Monetary Policy; Delegation (search for similar items in EconPapers)
JEL-codes: E52 E61 Q43 Q48 (search for similar items in EconPapers)
Date: 2003
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Related works:
Working Paper: Time-Inconsistent Environmental Policy And Optimal Delegation (2004)
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