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

Discussion Papers 1859, 35 S.

Olga Chiappinelli, Karsten Neuhoff

2020

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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.

Olga Chiappinelli

Research Associate in the Climate Policy Department

Karsten Neuhoff

Head of Department in the Climate Policy Department



JEL-Classification: C73;L51;O31;Q58
Keywords: Carbon pricing, time-inconsistency, green technology, climate policy, carbon contracts