Climate Policy with Tied Hands: Optimal Resource Taxation Under Implementation Lags

Corrado Di Maria*, Sjak Smulders, Edwin van der Werf

*Corresponding author for this work

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1 Citation (Scopus)

Abstract

In the presence of implementation lags, announced Pigouvian taxation leads to fossil fuel prices that are too low from society’s perspective. This results in excessive emissions and reduced incentives for green innovation. Such effects are compounded by the presence of pre-existing subsidies to fossil fuel use. We show that the intertemporal resource tax path may need to be modified to optimally take into account the perverse incentives from policy lags and pre-existing policies. We find that it might be optimal to subsidize, rather than tax resource extraction at the instant of implementation.

Original languageEnglish
Pages (from-to)537-551
JournalEnvironmental and Resource Economics
Volume66
Issue number3
DOIs
Publication statusPublished - 2017

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Keywords

  • Carbon tax
  • Climate policy
  • Green Paradox
  • Implementation lag
  • Non-renewable resources
  • Resource taxation
  • Second-best

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