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Time-Consistent Carbon Pricing

Olga Chiappinelli and Karsten Neuhoff ()

No 1710, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: In this paper we show that carbon pricing is subject to time-inconsistency and we investigate solutions to improve on the problem and restore the incentive for the private sector to invest in low-carbon innovation. We show that a superior price- investment equilibrium can be sustained in the long-term, if the policy-maker is enough forward looking and allowed to build reputation. In the short-term, time- inconsistency can be alleviated by complementing carbon pricing with project-based carbon price guarantees.

Keywords: Carbon pricing; Time-inconsistency; Low-carbon innovation; Environmental regulation; Repeated games; Carbon contracts (search for similar items in EconPapers)
JEL-codes: C73 L51 O31 Q58 (search for similar items in EconPapers)
Pages: 18 p.
Date: 2017
New Economics Papers: this item is included in nep-agr, nep-ene, nep-env and nep-reg
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