Second-best climate policies to decarbonize the economy: commitment and the Green Paradox

Rezai, Armon and van der Ploeg, Frederick (2017) Second-best climate policies to decarbonize the economy: commitment and the Green Paradox. Environmental and Resource Economics, 66 (3). pp. 409-434. ISSN 1573-1502

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Climate change must deal with two market failures: global warming and learning by doing in renewable energy production. The first-best policy consists of an aggressive renewables subsidy in the near term and a gradually rising and falling carbon tax. Given that global carbon taxes remain elusive, policy makers might have to rely on a second-best subsidy only. With credible commitment the second-best subsidy is higher than the social benefit of learning to cut the transition time and peak warming close to first-best levels at the cost of higher fossil fuel use in the short run (weak Green Paradox). Without commitment the second-best subsidy is set to the social benefit of learning. It generates smaller weak Green Paradox effects, but the transition to the carbon-free takes longer and cumulative carbon emissions are higher. Under first best and second best with pre-commitment peak warming is 2.1-2.3 °C, under second best without commitment 3.5 °C, and without any policy 5.1 °C above pre-industrial levels. Not being able to commit yields a welfare loss of 95% of initial GDP compared to first best. Being able to commit brings this figure down to 7%.

Item Type: Article
Additional Information: Previous versions of this paper have benefited from helpful comments from Erik Ansink, Reyer Gerlagh, John Hassler, Per Krusell and seminar participants at Oxford, Tilburg and the Tinbergen Institute and audiences at Annecy, SURED 2014, Ascona, and WCERE 2014, Istanbul. The first author is grateful for financial support from the OeNB Anniversary Fund grant (Grant No. 15330) and a grant from the Austrian Science Fund (FWF): J3633. The second is grateful for support from the ERC Advanced Grant 'Political Economy of Green Paradoxes' (FP7-IDEAS-ERC Grant No. 269788).
Keywords: first best / second best / commitment / Markov-perfect / Ramsey growth / carbon tax / renewables subsidy / learning by doing / directed technical change
Classification Codes: JEL H21; Q51; Q54
Divisions: Departments > Sozioökonomie > Ecological Economics
Version of the Document: Published
Variance from Published Version: None
Depositing User: Elena Simukovic
Date Deposited: 12 Dec 2016 14:51
Last Modified: 01 Aug 2020 19:40
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