Adverse Selection as a Policy Instrument: Unraveling Climate Change

Steve Cicala, David Hemous and Morten G. Olsen

No 30283, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper applies principles of adverse selection to overcome obstacles that prevent the implementation of Pigouvian policies to internalize externalities. Focusing on negative externalities from production (such as pollution), we consider settings in which aggregate emissions are known, but individual contributions are unobserved by the government. We evaluate a policy that gives firms the option to pay a tax on their voluntarily and verifiably disclosed emissions, or pay an output tax based on the average rate of emissions among the undisclosed firms. The certification of relatively clean firms raises the output-based tax, setting off a process of unraveling in favor of disclosure. We derive sufficient statistics formulas to calculate the welfare of such a program relative to mandatory output or emissions taxes. We find that the voluntary certification mechanism would deliver significant gains over output-based taxation in two empirical applications: methane emissions from oil and gas fields, and carbon emissions from imported steel.

JEL-codes: D82 H2 H87 K32 L51 Q54 (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
Note: EEE IO LE PE POL
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.nber.org/papers/w30283.pdf (application/pdf)

Related works:
Working Paper: Adverse Selection as a Policy Instrument: Unraveling Climate Change (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:30283

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w30283

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().