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Modeling Time-inconsistent Climate Policy

Ek, Claes LU (2010) NEKM01 20101
Department of Economics
Abstract (Swedish)
This paper examines the degree to which dynamic inconsistency in climate policy presents a serious challenge in the sense that exclusively pursuing near-term cost-efficiency implies strong disincentives for policy makers to attain long-term abatement goals. We model technological change and cost-efficient emissions cuts of roughly 80% in the EU-27 energy sector during the forty-year period 2010-2050. Our model features two broad cases, as we contrast `standard' long-term policy optimization with more
short-term, sequential optimization (i.e. across subsections of the 2010-2050 period). We find that changing the policy time frame in this manner has the unfortunate effect of working as a strong disincentive for both long-term and short-term... (More)
This paper examines the degree to which dynamic inconsistency in climate policy presents a serious challenge in the sense that exclusively pursuing near-term cost-efficiency implies strong disincentives for policy makers to attain long-term abatement goals. We model technological change and cost-efficient emissions cuts of roughly 80% in the EU-27 energy sector during the forty-year period 2010-2050. Our model features two broad cases, as we contrast `standard' long-term policy optimization with more
short-term, sequential optimization (i.e. across subsections of the 2010-2050 period). We find that changing the policy time frame in this manner has the unfortunate effect of working as a strong disincentive for both long-term and short-term targets, perhaps even making them politically - though not theoretically - impossible to attain under
most scenarios. One conclusion is that although policy makers may now commit to ambitious emissions reductions deemed realistic based on a long-term analysis, unless targets and policies are sufficiently `locked in' the credibility of those commitments may be doubted. Another is that the idea that climate policy should be cost-efficient in the near term is inherently contradictory, because a decision maker who truly cares
only about the near term has little incentive to undertake climate policy to begin with. (Less)
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author
Ek, Claes LU
supervisor
organization
course
NEKM01 20101
year
type
H1 - Master's Degree (One Year)
subject
keywords
energy, cost-efficiency, dynamic consistency, climate change, long-term targets
language
English
id
1613648
date added to LUP
2010-06-22 11:10:49
date last changed
2010-06-22 11:10:49
@misc{1613648,
  abstract     = {This paper examines the degree to which dynamic inconsistency in climate policy presents a serious challenge in the sense that exclusively pursuing near-term cost-efficiency implies strong disincentives for policy makers to attain long-term abatement goals. We model technological change and cost-efficient emissions cuts of roughly 80% in the EU-27 energy sector during the forty-year period 2010-2050. Our model features two broad cases, as we contrast `standard' long-term policy optimization with more
short-term, sequential optimization (i.e. across subsections of the 2010-2050 period). We find that changing the policy time frame in this manner has the unfortunate effect of working as a strong disincentive for both long-term and short-term targets, perhaps even making them politically - though not theoretically - impossible to attain under
most scenarios. One conclusion is that although policy makers may now commit to ambitious emissions reductions deemed realistic based on a long-term analysis, unless targets and policies are sufficiently `locked in' the credibility of those commitments may be doubted. Another is that the idea that climate policy should be cost-efficient in the near term is inherently contradictory, because a decision maker who truly cares
only about the near term has little incentive to undertake climate policy to begin with.},
  author       = {Ek, Claes},
  keyword      = {energy,cost-efficiency,dynamic consistency,climate change,long-term targets},
  language     = {eng},
  note         = {Student Paper},
  title        = {Modeling Time-inconsistent Climate Policy},
  year         = {2010},
}