Confronting the carbon pricing gap: Second best climate policy

Katheline Schubert, Aude Pommeret () and Francesco Ricci
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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: Confronted with political opposition to the implementation of efficient carbon pricing, climate policy relies on alternative policy interventions, at a cost in terms of welfare and public finance. In order to evaluate this cost, this paper studies, in the context of the energy transition, second best climate policies constrained to keeping a constant level of the carbon tax and combining it with subsidies to carbon-free electricity generation. This subsidies can take the form of a feed-in premium paid to electricity produced from carbon-free sources, or of subsidies to investment in green capacity. Within a stylized dynamic model where energy may be produced with fossil or carbon-free sources and climate policy aims at satisfying a carbon budget, we define and characterize the carbon pricing gap. We show that if the constant carbon tax is small and therefore the carbon pricing gap large, the subsidy to carbon-free sources should be so large to foster rapid build up of green capacity that it would imply large investment costs and huge financial burden on the public budget, and a large welfare loss. We calibrate the model to the European energy market to obtain orders of magnitude of the effects.

Keywords: Energy transition; Carbon tax; Subsidies; FIP; Carbon-free energy; Policy acceptability (search for similar items in EconPapers)
Date: 2023-04
New Economics Papers: this item is included in nep-ene and nep-env
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-04075395v1
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Confronting the carbon pricing gap: Second best climate policy (2023)
Working Paper: Confronting the Carbon Pricing Gap: Second Best Climate Policy (2022)
Working Paper: Confronting the Carbon Pricing Gap: Second Best Climate Policy (2022)
Working Paper: Confronting the Carbon Pricing Gap: Second Best Climate Policy (2022)
Working Paper: Confronting the Carbon Pricing Gap: Second Best Climate Policy (2022)
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