Believe me when I say green! Heterogeneous expectations and climate policy uncertainty

Emanuele Campiglio, Francesco Lamperti and Roberta Terranova

Journal of Economic Dynamics and Control, 2024, vol. 165, issue C

Abstract: We develop a dynamic model where heterogeneous firms take investment decisions depending on their beliefs on future carbon prices. A policy-maker announces a forward-looking carbon price schedule but can decide to default on its plans if perceived transition risks are high. We show that weak policy commitment, especially when combined with ambitious mitigation announcements, can trap the economy into a vicious circle of credibility loss, carbon-intensive investments and increasing risk perceptions, ultimately leading to a failure of the transition. The presence of behavioural frictions and heterogeneity - both in capital investment choices and in the assessment of the policy-maker's credibility - has strong non-linear effects on the transition dynamics and the emergence of ‘high-carbon traps’. We identify analytical conditions leading to a successful transition and provide a numerical application for the EU economy.

Keywords: Beliefs; Behavioural macroeconomics; Credibility; Investment decision-making; Heterogeneous expectations; Low-carbon transition; Policy uncertainty (search for similar items in EconPapers)
JEL-codes: C63 D84 E71 Q54 Q58 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Believe me when I say green! Heterogeneous expectations and climate policy uncertainty (2024)
Working Paper: Believe me when I say green! Heterogeneous expectations and climate policy uncertainty (2023)
Working Paper: Believe me when I say green! Heterogeneous expectations and climate policy uncertainty (2023)
Working Paper: Believe me when I say green! Heterogeneous expectations and climate policy uncertainty (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:165:y:2024:i:c:s0165188924000927

DOI: 10.1016/j.jedc.2024.104900

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