Second-Best Renewable Subsidies to De-Carbonize the Economy: Commitment and the Green Paradox
Armon Rezai and
Frederick (Rick) van der Ploeg ()
No 5721, CESifo Working Paper Series from CESifo Group Munich
Climate change must deal with two market failures: global warming and learning by doing in renewable use. The first-best policy consists of an aggressive renewables subsidy in the near term and a gradually rising and falling carbon tax. Given that global carbon taxes remain elusive, policy makers have to use a second-best subsidy. In case of credible commitment, the second-best subsidy is set higher than the social benefit of learning. It allows the transition time and peak warming close to first-best levels at the cost of higher fossil fuel use (weak Green Paradox). If policy makers cannot commit, the second-best subsidy is set to the social benefit of learning. It generates smaller weak Green Paradox effects, but the transition to the carbon-free takes longer and cumulative carbon emissions are higher. Under first-best and second best with pre-commitment peak warming is 2.1 - 2.3 Â°C, under second best without commitment 3.5Â°C, and without any policy temperature 5.1Â°C above pre-industrial levels. Not being able to commit yields a welfare loss of 95% of initial GDP compared to first best. Being able to commit brings this figure down to 7%.
Keywords: first-best and second-best policy; commitment; Markov-perfect; Ramsey growth; carbon tax; renewables subsidy; learning by doing; directed technical change (search for similar items in EconPapers)
JEL-codes: H21 Q51 Q54 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (3) Track citations by RSS feed
Downloads: (external link)
Journal Article: Second-Best Renewable Subsidies to De-carbonize the Economy: Commitment and the Green Paradox (2017)
Working Paper: Second-Best Renewable Subsidies to De-Carbonize the Economy: Commitment and the Green Paradox (2016)
Working Paper: Second-Best Renewable Subsidies to De-Carbonize the Economy; Commitment and the Green Paradox (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_5721
Access Statistics for this paper
More papers in CESifo Working Paper Series from CESifo Group Munich Contact information at EDIRC.
Series data maintained by Klaus Wohlrabe ().