Inefficient Policies in the Green Transition

• In Event: Political Economy of Environmental Policy

Abstract

Despite economists almost unanimously recommending carbon pricing, governments have enacted a variety of economically more costly policies such as standards and green energy subsidies. In this paper I study a dynamic model of climate policy-making that can explain the transitory use of inefficient policies followed by carbon pricing. Two political parties that differ in their preferences for environmental outcomes compete in each period, and the winner chooses policy. Policy alters production but also investment decisions, which shape political incentives in the future. In equilibrium policymakers use green investment subsidies in a first stage to build a political coalition in support of more stringent climate policy, use them in a second stage in combination with a carbon price to correct for underinvestment produced by political turnover, and rely entirely on the carbon price after investment reaches a steady state. The model formalizes the logic of policy sequencing, and makes empirical predictions about the duration of the transition to efficient policies.

Author

• Juan Dodyk, Harvard University