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

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  • Olga Chiappinelli
  • Karsten Neuhoff

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.

Suggested Citation

  • Olga Chiappinelli & Karsten Neuhoff, 2020. "Time-Consistent Carbon Pricing: The Role of Carbon Contracts for Differences," Discussion Papers of DIW Berlin 1859, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1859
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    2. Chaves, J. P. & Cossent, R. & Gómez San Román, T. & Linares, P. & Rivier, M., 2023. "An assessment of the European electricity market reform options and a pragmatic proposal," Cambridge Working Papers in Economics 2325, Faculty of Economics, University of Cambridge.
    3. Chiappinelli, Olga & May, Nils, 2022. "Too good to be true? Time-inconsistent renewable energy policies," Energy Economics, Elsevier, vol. 112(C).
    4. Lena Tholen & Anna Leipprand & Dagmar Kiyar & Sarah Maier & Malte Küper & Thomas Adisorn & Andreas Fischer, 2021. "The Green Hydrogen Puzzle: Towards a German Policy Framework for Industry," Sustainability, MDPI, vol. 13(22), pages 1-19, November.
    5. Schlund, David & Schönfisch, Max, 2021. "Analysing the impact of a renewable hydrogen quota on the European electricity and natural gas markets," Applied Energy, Elsevier, vol. 304(C).
    6. Jeddi, Samir & Lencz, Dominic & Wildgrube, Theresa, 2021. "Complementing carbon prices with Carbon Contracts for Difference in the presence of risk - When is it beneficial and when not?," EWI Working Papers 2021-9, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI), revised 16 Aug 2022.
    7. Mandaroux, Rahel & Schindelhauer, Kai & Basse Mama, Houdou, 2023. "How to reinforce the effectiveness of the EU emissions trading system in stimulating low-carbon technological change? Taking stock and future directions," Energy Policy, Elsevier, vol. 181(C).
    8. 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).
    9. J.P. Chaves & R. Cossent & T. Gómez San Román & P. Linares & M. Rivier, 2023. "An assessment of the European electricity market reform options and a pragmatic proposal," Working Papers EPRG2305, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    10. Sato, Misato & Rafaty, Ryan & Calel, Raphael & Grubb, Michael, 2022. "Allocation, allocation, allocation! The political economy of the development of the European Union Emissions Trading System," LSE Research Online Documents on Economics 115431, London School of Economics and Political Science, LSE Library.
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    12. Haas, Christian & Kempa, Karol & Moslener, Ulf, 2023. "Dealing with deep uncertainty in the energy transition: What we can learn from the electricity and transportation sectors," Energy Policy, Elsevier, vol. 179(C).

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    More about this item

    Keywords

    Carbon pricing; time-inconsistency; green technology; climate policy; 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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