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Time-Consistent Carbon Pricing

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  • Olga Chiappinelli
  • Karsten Neuhoff

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.

Suggested Citation

  • Olga Chiappinelli & Karsten Neuhoff, 2017. "Time-Consistent Carbon Pricing," Discussion Papers of DIW Berlin 1710, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1710
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    File URL: https://www.diw.de/documents/publikationen/73/diw_01.c.574083.de/dp1710.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Nils May & Olga Chiappinelli, 2018. "Too Good to Be True? How Time-Inconsistent Renewable Energy Policies Can Deter Investments," Discussion Papers of DIW Berlin 1726, DIW Berlin, German Institute for Economic Research.
    2. Schlund, David & Schönfisch, Max, 2021. "Analysing the Impact of a Renewable Hydrogen Quota on the European Electricity and Natural Gas Markets," EWI Working Papers 2021-3, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).

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    More about this item

    Keywords

    Carbon pricing; Time-inconsistency; Low-carbon innovation; Environmental regulation; Repeated games; Carbon contracts;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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