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1710 Time-Consistent Carbon Pricing Olga Chiappinelli, Karsten Neuhoff 2017 18 S.

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Abstract:

In this paper we show that carbon pricing is subject to time-inconsistency and we investigate solutions to improve on the problem and restore the incentive for the private sector to invest in low-carbon innovation. We show that a superior price- investment equilibrium can be sustained in the long-term, if the policy-maker is enough forward looking and allowed to build reputation. In the short-term, time- inconsistency can be alleviated by complementing carbon pricing with project-based carbon price guarantees.

JEL-Classification:

C73;L51;O31;Q58

Keywords:

Carbon pricing, Time-inconsistency, Low-carbon innovation, Environmental regulation, Repeated games, Carbon contracts