CESifo working paper: Energy and Climate Economics 3760
Taking a political economy perspective this paper proposes an alternative carbon abatement policy instrument with significant advantages over existing policy instruments. The key feature of the proposed carbon securities is that they entitle their owners to a fixed proportion of ex ante unknown total emissions. The total level of carbon emissions is set by the political process after the carbon securities have been sold. A key benefit of the proposed carbon security is that it creates a group of stakeholders, whose interest is for a smaller level of emissions and which competes with industries that consume significant amounts of carbon-based energy. The advantages over existing policy tools include an equilibrium carbon price closer to the level preferred by voters and a more predictable environmental policy in the presence of either climate or political uncertainty.