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.
Original language | English |
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Pages (from-to) | 1-44 |
Journal | Journal of the European Economic Association |
Volume | 16 |
Issue number | 1 |
Early online date | Mar 2017 |
DOIs | |
Publication status | Published - Feb 2018 |