Confronting the carbon pricing gap: Second best climate policy | Katheline Schubert
Katheline Schubert is Professor of Economics at University Paris 1 Panthéon-Sorbonne. Katheline will be discussing the paper Confronting the carbon pricing gap: Second best climate policy. (Aude Pommeret, Francesco Ricci and Katheline Schubert).
Confronted with political opposition to the implementation of efficient direct carbon pricing, climate policy relies on alternative policy interventions, at a cost in terms of welfare and public finance. In order to evaluate this cost, this paper studies second best climate policies constrained to keeping a constant level of the carbon tax and combining it with subsidies to renewables. This subsidies can take the form of a feed-in-premium paid to electricity produced from renewable sources, or of subsidies to investment in renewable capacity. Within a stylized dynamic model where electricity can be produced with fossil or renewable sources and climate policy aims at satisfying a carbon budget, we define and characterize the carbon pricing gap. We show that if the constant carbon tax is small the carbon pricing gap is large. Then, the subsidy to renewables should be so large to foster rapid build up of renewable capacity, that it would imply large investment costs and financial burden on the public budget, and a large welfare loss. We calibrate the model to the European electricity market to obtain orders of magnitude of the effects.