Confronting the Carbon Pricing Gap: Second-Best Climate Policy

Katheline Schubert, Aude Pommeret and Francesco Ricci

Journal of the Association of Environmental and Resource Economists, 2026, vol. 13, issue 2, 293 - 324

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.

Date: 2026
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Related works:
Working Paper: Confronting the carbon pricing gap: Second best climate policy (2023)
Working Paper: Confronting the carbon pricing gap: Second best climate policy (2023)
Working Paper: Confronting the Carbon Pricing Gap: Second Best Climate Policy (2022)
Working Paper: Confronting the Carbon Pricing Gap: Second Best Climate Policy (2022)
Working Paper: Confronting the Carbon Pricing Gap: Second Best Climate Policy (2022)
Working Paper: Confronting the Carbon Pricing Gap: Second Best Climate Policy (2022)
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