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Time-Consistent Carbon Pricing: The Role of Carbon Contracts for Differences

Olga Chiappinelli and Karsten Neuhoff ()

No 1859, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: Carbon pricing decisions by governments are prone to time-inconsistency, which causes the private sector to underinvest in emission-reducing technologies. We show that incentives for decarbonization can be improved if complementing carbon pricing with carbon contracts for differences, where the government commits to pay a fixed carbon price level to the investors. We derive conditions under which the government is willing to “tie its hands” with the contracts.

Keywords: Carbon pricing; time-inconsistency; green technology; climate policy; carbon contracts (search for similar items in EconPapers)
JEL-codes: C73 L51 O31 Q58 (search for similar items in EconPapers)
Pages: 35 p.
Date: 2020
New Economics Papers: this item is included in nep-agr, nep-cta, nep-ene, nep-env and nep-gen
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