Working Paper

Climate Policy as Expectation Management?

Author

  • Daiju Narita
Publication Date

It is believed that the primary economic solution to climate change is an introduction of a carbon pricing system anchored to the social cost of carbon, either as a form of tax or tradable permits. Potentially significant externalities accompanying the introduction of emission-reducing technologies, however, imply that the standard argument does not capture some important aspects for the designing of climate policy such as expectation-driven technology adoption. By using a simple model, we show some possible cases where carbon emission reduction progresses in a self-fulfilling prophecy by firms expecting others’ future actions. In such circumstances, the carbon pricing system does not have much influence on determining the final outcome of economy-wide emission reduction. This highlights the danger of overemphasis on finding the “right” carbon price in policy making and the role of climate policy as expectation management.

Kiel Institute Expert

Info

JEL Classification
Q54, O33

Key Words

  • climate policy
  • expectations
  • Klimapolitik
  • multiple equilibria
  • technology choice

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