Commitment vs. Discretion in Climate and Energy Policy

Arbeitspapier

To decarbonize the power sector policy-makers need to commit to long-term credible rules for climate and energy policy. Otherwise, time-inconsistent policy-making will impair investments into low-carbon technologies. However, the future benefits and costs of decarbonization are subject to substantial uncertainties. Thus, there may also be societal gains from allowing policy-makers the discretion to adjust the policies as new information becomes available. We examine how this trade-off between policy commitment and discretion affects the optimal intertemporal design of policies to support the deployment of renewable energy sources. Using a dynamic partial equilibrium model of the power sector, we show that commitment to state-contingent renewable subsidies outperforms both unconditional commitment and discretion. The choice between the practically more feasible approaches of unconditional commitment and discretion is analytically ambiguous. A numerical illustration with naïve assumptions suggests that policy discretion may outperform unconditional commitment in terms of welfare. However, extensions to more realistic cases where only a limited fraction of climate uncertainty resolves, where future policy-makers have own agendas, or with risk-averse investors show commitment as favorable.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 6355

Classification and Topics

• Classification: Wirtschaft ; Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies ; Alternative Energy Sources ; Energy: Government Policy ; Climate; Natural Disasters and Their Management; Global Warming ; Environmental Economics: Government Policy
• Subject: climate change ; public policy ; subsidies ; renewable energy ; time inconsistency ; uncertainty ; commitment ; hold-up

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Habermacher, Florian ; Lehmann, Paul
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/155597
• Last update: 10.03.2025, 11:44 AM CET