Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/155597
Authors: 
Habermacher, Florian
Lehmann, Paul
Year of Publication: 
2017
Series/Report no.: 
CESifo Working Paper 6355
Abstract: 
To decarbonize the power sector policy-makers need to commit to long-term credible rules for climate and energy policy. Otherwise, time-inconsistent policy-making will impair investments into low-carbon technologies. However, the future benefits and costs of decarbonization are subject to substantial uncertainties. Thus, there may also be societal gains from allowing policy-makers the discretion to adjust the policies as new information becomes available. We examine how this trade-off between policy commitment and discretion affects the optimal intertemporal design of policies to support the deployment of renewable energy sources. Using a dynamic partial equilibrium model of the power sector, we show that commitment to state-contingent renewable subsidies outperforms both unconditional commitment and discretion. The choice between the practically more feasible approaches of unconditional commitment and discretion is analytically ambiguous. A numerical illustration with naïve assumptions suggests that policy discretion may outperform unconditional commitment in terms of welfare. However, extensions to more realistic cases where only a limited fraction of climate uncertainty resolves, where future policy-makers have own agendas, or with risk-averse investors show commitment as favorable.
Subjects: 
climate change
public policy
subsidies
renewable energy
time inconsistency
uncertainty
commitment
hold-up
JEL: 
H23
Q42
Q48
Q54
Q58
Document Type: 
Working Paper

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