Confronting the Carbon Pricing Gap: Second-Best Climate Policy

Katheline Schubert (), Francesco Ricci () and Aude Pommeret ()
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Francesco Ricci: CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - INRA - Institut National de la Recherche Agronomique - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier, UM - Université de Montpellier
Aude Pommeret: IREGE - Institut de Recherche en Gestion et en Economie - USMB [Université de Savoie] [Université de Chambéry] - Université Savoie Mont Blanc

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Abstract: Faced with political opposition to efficient carbon pricing, climate policy resorts to alternative instruments, which come with welfare and fiscal costs of acceptability. To assess these costs, this study examines second-best policies combining a constant carbon tax with subsidies to carbon-free electricity generation and storage. Using a stylized dynamic model of the energy transition featuring fossil and clean energy sources and a carbon budget, we show that the lower the carbon tax, the greater the carbon pricing gap, and the larger the subsidies required to meet the carbon budget. Overaccumulation of clean capital may be needed to crowd out fossil fuels. Calibration to the European energy market reveals costs of acceptability up to 2.6% of welfare and a budget shortfall equivalent to 56% of the present value of electricity consumption. This suggests that relying on green subsidies for the energy transition may be unwise.

Date: 2026-01-12
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Published in Journal of the Association of Environmental and Resource Economists, 2026, 13 (2), ⟨10.1086/739152⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05736847

DOI: 10.1086/739152

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