Confronting the Carbon Pricing Gap: Second Best Climate Policy

Katheline Schubert (), Aude Pommeret () and Francesco Ricci ()
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Katheline Schubert: PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - ENPC - École nationale des ponts et chaussées - IP Paris - Institut Polytechnique de Paris
Aude Pommeret: USMB [Université de Savoie] [Université de Chambéry] - Université Savoie Mont Blanc
Francesco Ricci: CEE-M - Centre d'Economie de l'Environnement - Montpellier - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Institut Agro Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - UM - Université de Montpellier

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Abstract: Faced with political opposition to efficient carbon pricing, climate policy resorts to alternative instruments, which come with welfare and fiscal costs of acceptability. To assess these costs, this study examines second-best policies combining a constant carbon tax with subsidies to carbon-free electricity generation and storage. Using a stylized dynamic model of the energy transition featuring fossil and clean energy sources and a carbon budget, we show that the lower the carbon tax, the greater the carbon pricing gap, and the larger the subsidies required to meet the carbon budget. Overaccumulation of clean capital may be needed to crowd out fossil fuels. Calibration to the European energy market reveals costs of acceptability up to 2.6% of welfare and a budget shortfall equivalent to 56% of the present value of electricity consumption. This suggests that relying on green subsidies for the energy transition may be unwise.

Keywords: Energy transition; Carbon tax; Renewable energy; Policy acceptability (search for similar items in EconPapers)
Date: 2026
Note: View the original document on HAL open archive server: https://hal.inrae.fr/hal-05650926v1
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Published in Journal of the Association of Environmental and Resource Economists, 2026, 13 (2), ⟨10.1086/739152⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05650926

DOI: 10.1086/739152

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