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Consistent climate policies

Author

Listed:
  • Reyer Gerlagh
  • Matti Liski
Abstract
What are the optimal climate policies when time preferences deviate from the standard exponential discounting and decision makers cannot commit to future policies? We show that, with time-declining discounting, the delay and persistence of climate impacts provide a commitment device to policy makers. We quantify the commitment value in a climate-economy model by solving time-consistent Markov equilibrium capital and emission taxes explicitly. The returns on capital and climate investments are no longer equal, leading to a large increase in the emission tax, compared to a benchmark with equalized returns. The commitment value increases the tax by a factor of 20 in our quantitative assessment.

Suggested Citation

  • Reyer Gerlagh & Matti Liski, 2018. "Consistent climate policies," Journal of the European Economic Association, European Economic Association, vol. 16(1), pages 1-44.
    • Handle: RePEc:oup:jeurec:v:16:y:2018:i:1:p:1-44.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvx010
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