Working Paper: NBER ID: w30535
Authors: Derek Lemoine
Abstract: I study how policymakers can access and act on the information about climate change damages that is dispersed throughout the economy. I analyze a new dynamic deposit-refund instrument (called “carbon shares”). I show that there exists a limit-case rational expectations equilibrium in which it: i) efficiently prices emissions conditional on information, ii) efficiently incentivizes removal of past emissions conditional on information, and iii) efficiently aggregates dispersed information about the social cost of emissions. Conventional emission taxes generally succeed at only the first of these objectives. Rather than projecting damages in all future periods and all possible states of the world in order to calculate the optimal tax, the regulator here estimates damages as they are realized and empowers markets to perform price discovery about future damages.
Keywords: Climate Policy; Carbon Shares; Market-Based Instruments
JEL Codes: D82; G14; H23; Q54; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| carbon shares (Q35) | price of emissions (Q31) |
| price of emissions (Q31) | incentives for firms to reduce emissions (Q52) |
| carbon shares (Q35) | removal of past emissions (Q52) |
| value of carbon share (D33) | expected refunds based on realized damages (K13) |
| dispersed information about social cost of emissions (Q52) | market price of carbon shares (Q31) |