Juan Dodyk (Harvard), "Inefficient Policies in the Green Transition"
Countries have employed a wide range of policy instruments to mitigate climate change. These policies share a common pattern: governments initially rely on subsidies, together with command-and-control regulations, and eventually adopt carbon pricing. I develop a dynamic model of climate policymaking that accounts for this pattern. Although the first-best policy is solely a carbon tax, a climate-concerned policymaker uses subsidies to induce investments in emissions-abatement technologies with the goal of building a coalition in support of efficient policies in the future. The model provides additional insights: First, a policy package that satisfies political constraints and passes a cost-benefit analysis only exists if the economic costs of decarbonization are not too large, and the social cost of carbon is intermediate. Second, soft commitments, such as net-zero targets, can have real consequences by shifting expectations, but only if initial political pressure is not too large and policymakers are sufficiently concerned about climate. Finally, a higher risk of electoral turnover that replaces a green proposer with a misaligned brown proposer can improve prospects for a green transition.
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