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
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