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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