Published in
CREE Working Paper 2/2012
Abstract
Countries with an active climate policy often use several other
policy instruments in addition to a price on carbon emissions, such
as subsidies to renewable energy. An obvious reason for subsidizing
alternatives to carbon energy is that the price of carbon emissions is
"too low". The paper derives implications for a second-best climate
policy if for some reason the price of carbon emissions is lower than the
Pigovian level, and also discusses reasons policy makers might have
for setting the tax rate at an ine¢ ciently low level. Even if the current
tax rate is optimally set, governments cannot commit to future tax
rates. In some cases this inabilty to commit may justify subsidies to
investments in renewable energy.