The Political Economy of Carbon Securities and Environmental Policy

Abstract

Taking a political economy perspective this paper proposes an alternative carbon abatement policy instrument with significant advantages over existing policy instruments. The key feature of the proposed carbon securities is that they entitle their owners to a fixed proportion of ex ante unknown total emissions. The total level of carbon emissions is set by the political process after the carbon securities have been sold. In contrast to a traditional permit system, in which a government's choice of emissions quota is influenced by one lobby which represents industries that consume significant amounts of carbon-based energy, a system based on carbon securities creates an additional group of stakeholders at the other side of the issue. The advantages over existing policy tools include an equilibrium carbon price closer to the social optimum, a more predictable environmental policy in the presence of either climate or political uncertainty, and higher investment in abatement technology.

Keywords: Carbon abatement, environmental policy, global warming, interest groups, lobbying, policy instrument design, political process

JEL Classification: D72, Q54, Q58