Kiel Working Papers, Kiel Institute for World Economics
No 1681:
Climate Policy as Expectation Management?
Daiju Narita
Abstract: It is often emphasized that the primary economic solution
to climate change is the introduction of a carbon pricing system (tax or
tradable permits) anchored to the social cost of carbon. This standard
argument, however, misses the fact that if emission reduction is sought
through the use of technologies with network externalities, the level of
emission reduction can become expectation-driven rather than uniquely
determined by the level of carbon price. Using a simple model, the paper
discusses the possibility that the effectiveness of carbon policy is
influenced by firms’ belief on carbon policy and technology penetration in
the future – in extreme cases, expectations prevail over policy. This
feature 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)
30 pages, February 2011
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