Commitment vs. Discretion in Climate and Energy Policy
Florian Habermacher () and
No 6355, CESifo Working Paper Series from CESifo
To decarbonize the power sector policy-makers need to commit to long-term credible rules for climate and energy policy. Otherwise, time-inconsistent policy-making will impair investments into low-carbon technologies. However, the future benefits and costs of decarbonization are subject to substantial uncertainties. Thus, there may also be societal gains from allowing policy-makers the discretion to adjust the policies as new information becomes available. We examine how this trade-off between policy commitment and discretion affects the optimal intertemporal design of policies to support the deployment of renewable energy sources. Using a dynamic partial equilibrium model of the power sector, we show that commitment to state-contingent renewable subsidies outperforms both unconditional commitment and discretion. The choice between the practically more feasible approaches of unconditional commitment and discretion is analytically ambiguous. A numerical illustration with naïve assumptions suggests that policy discretion may outperform unconditional commitment in terms of welfare. However, extensions to more realistic cases where only a limited fraction of climate uncertainty resolves, where future policy-makers have own agendas, or with risk-averse investors show commitment as favorable.
Keywords: climate change; public policy; subsidies; renewable energy; time inconsistency; uncertainty; commitment; hold-up (search for similar items in EconPapers)
JEL-codes: H23 Q42 Q48 Q54 Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta, nep-ene, nep-env and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_6355
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