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Kiel Institute for World Economics Kiel Working Papers, Kiel Institute for World Economics

No 1624:
Climate Policy as Expectation Management?

Daiju Narita

Abstract: It is believed that the primary economic solution to climate change is an introduction of a carbon pricing system anchored to the social cost of carbon, either as a form of tax or tradable permits. Potentially significant externalities accompanying the introduction of emission-reducing technologies, however, imply that the standard argument does not capture some important aspects for the designing of climate policy such as expectation-driven technology adoption. By using a simple model, we show some possible cases where carbon emission reduction progresses in a self-fulfilling prophecy by firms expecting others’ future actions. In such circumstances, the carbon pricing system does not have much influence on determining the final outcome of economy-wide emission reduction. This highlights the danger of overemphasis on finding the “right” carbon price in policy making and the role of climate policy as expectation management

Keywords: climate policy, technology choice, expectations, multiple equilibria; (follow links to similar papers)

JEL-Codes: Q54,; O33; (follow links to similar papers)

17 pages, May 2010

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