Second-Best Renewable Subsidies to De-Carbonize the Economy: Commitment and the Green Paradox
Armon Rezai and
Frederick (Rick) van der Ploeg ()
No 11552, CEPR Discussion Papers from C.E.P.R. Discussion Papers
Climate change must deal with two market failures: global warming and learning by doing in renewable energy production. 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 might have to rely on a second-best subsidy only. With credible commitment the second-best subsidy is higher than the social benefit of learning to cut the transition time and peak warming close to first-best levels at the cost of higher fossil fuel use in the short run (weak Green Paradox). Without commitment 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 °C, under second best without commitment 3.5°C, and without any policy 5.1°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: carbon tax; commitment; learning by doing; Ramsey growth; renewables subsidy (search for similar items in EconPapers)
JEL-codes: H21 Q51 Q54 (search for similar items in EconPapers)
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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)
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