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Optimal Commitment Under Uncertainty: Adjustment Rules for Climate Policy

Author

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  • Jakob, Michael
  • Brunner, Steffen

Abstract

This paper analyses the optimal type and degree of commitment to a future climate policy when damage costs from climate change are uncertain. Taking uncertainty into account, it is shown within the framework of a sequential game between firms and a regulator that commitment to an emission abatement target fails to achieve the first best optimal outcome. Though commitment to a future policy reduces the risk of time-inconsistency, it imposes costs in the form of reduced flexibility to respond to new information. If, however, the regulator commits to an adjustment rule that sets the abatement level contingent on the realization of the uncertain parameter, the first best optimal outcome can be obtained.

Suggested Citation

  • Jakob, Michael & Brunner, Steffen, 2014. "Optimal Commitment Under Uncertainty: Adjustment Rules for Climate Policy," Strategic Behavior and the Environment, now publishers, vol. 4(3), pages 291-310, August.
    • Handle: RePEc:now:jnlsbe:102.00000047
    DOI: 10.1561/102.00000047
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    Citations

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    Cited by:

    1. Moner-Colonques, R. & Rubio, S., 2015. "The timing of environmental policy in a duopolistic market," Economia Agraria y Recursos Naturales, Spanish Association of Agricultural Economists, vol. 15(01).
    2. Olli-Pekka Kuusela & Jussi Lintunen, 2020. "A Cap-and-Trade Commitment Policy with Allowance Banking," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 75(3), pages 421-455, March.
    3. Sendstad, Lars H. & Hagspiel, Verena & Mikkelsen, Wilhelm Jebsen & Ravndal, Ruben & Tveitstøl, Martin, 2022. "The impact of subsidy retraction on European renewable energy investments," Energy Policy, Elsevier, vol. 160(C).
    4. Polzin, Friedemann & Egli, Florian & Steffen, Bjarne & Schmidt, Tobias S., 2019. "How do policies mobilize private finance for renewable energy?—A systematic review with an investor perspective," Applied Energy, Elsevier, vol. 236(C), pages 1249-1268.
    5. Marcel Nutz & Florian Stebegg, 2022. "Climate change adaptation under heterogeneous beliefs," Mathematics and Financial Economics, Springer, volume 16, number 3, December.
    6. Chiappinelli, Olga & May, Nils, 2022. "Too good to be true? Time-inconsistent renewable energy policies," Energy Economics, Elsevier, vol. 112(C).
    7. Suzi Kerr & Catherine Leining, 2019. "Uncertainty, Risk and Investment and the NZ ETS," Working Papers 19_08, Motu Economic and Public Policy Research.
    8. Florian Habermacher & Paul Lehmann, 2020. "Commitment Versus Discretion in Climate and Energy Policy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 76(1), pages 39-67, May.

    More about this item

    Keywords

    Time-inconsistency; Commitment; Adjustment rule;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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