Working Paper: CEPR ID: DP16985
Authors: Fabian Herweg; Klaus M. Schmidt
Abstract: Carbon prices are the most powerful instrument to reduce CO2 emissions, but there is strong political opposition to raising them to the efficient level. Therefore, additional efforts of consumers, firms, and local governments to reduce emissions are required. We study how regulatory regimes affect moral behavior and show that a carbon tax complements voluntary efforts to reduce emissions, while cap-and-trade discourages them. In the model consumers can invest in offsets which increases welfare and buy and delete emission rights which leads to more emissions. Furthermore, cap-and-trade shifts the burden of adjustment to poor consumers and has dysfunctional incentive effects. These results are robust to uncertainty and imperfect competition.
Keywords: carbon pricing; carbon tax; cap-and-trade; climate change; behavioral; industrial organization
JEL Codes: D62; H23; Q52; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| carbon pricing (Q58) | consumer behavior (D19) |
| carbon pricing (Q58) | CO2 emissions (Q54) |
| carbon tax (H23) | total emissions (Q54) |
| cap-and-trade (Q58) | total emissions (Q54) |
| cap-and-trade (Q58) | waterbed effect (C21) |
| cap-and-trade (Q58) | dysfunctional incentive effects (H31) |
| voluntary efforts (L31) | total emissions under cap-and-trade (Q58) |