What are the optimal climate policies when time preferences deviate from the standard exponential discounting and decision makers cannot commit to future policies? We show that, with time-declining discounting, the delay and persistence of climate impacts provide a commitment device to policy makers. We quantify the commitment value in a climate-economy model by solving time-consistent Markov equilibrium capital and emission taxes explicitly. The returns on capital and climate investments are no longer equal, leading to a large increase in the emission tax, compared to a benchmark with equalized returns. The commitment value increases the tax by a factor of 20 in our quantitative assessment.
|Number of pages||44|
|Journal||Journal of the European Economic Association|
|Early online date||28 Mar 2017|
|Publication status||Published - Feb 2018|
|MoE publication type||A1 Journal article-refereed|