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

37 Pages Posted: 15 Apr 2020

See all articles by Olga Chiappinelli

Olga Chiappinelli

German Institute for Economic Research (DIW Berlin)

Karsten Neuhoff

German Institute for Economic Research (DIW Berlin)

Date Written: April 2020

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.

Keywords: Carbon pricing, time-inconsistency, green technology, climate policy, carbon contracts

JEL Classification: C73,L51,O31,Q58

Suggested Citation

Chiappinelli, Olga and Neuhoff, Karsten, Time-Consistent Carbon Pricing: The Role of Carbon Contracts for Differences (April 2020). DIW Berlin Discussion Paper No. 1859, Available at SSRN: https://ssrn.com/abstract=3576402 or http://dx.doi.org/10.2139/ssrn.3576402

Olga Chiappinelli (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Karsten Neuhoff

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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