Adverse selection as a policy instrument: unraveling climate change

Steve Cicala, David Hemous and Morten Olsen

No 491, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: We propose a new policy instrument that leverages adverse selection when Pigouvian poli- cies are infeasible or undesirable. Our policy gives firms the option to pay a tax on their voluntarily disclosed emissions, or an output tax based on the average emissions among undis- closed firms. We derive sufficient statistics formulas to calculate the welfare gains relative to an output tax, and an algorithm to implement the policy with minimal information. In an application to methane emissions from oil and gas fields, our policy generates significant welfare gains. Finally, we extend our analysis to the design of international carbon policy.

JEL-codes: D82 H2 H87 K32 L51 Q54 (search for similar items in EconPapers)
Date: 2026-04
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Related works:
Working Paper: Adverse Selection as a Policy Instrument: Unraveling Climate Change (2022)
Working Paper: Adverse Selection as a Policy Instrument: Unraveling Climate Change (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:491

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