TIME-INCONSISTENT ENVIRONMENTAL POLICY ANDOPTIMAL DELEGATION

Time consistency problems can arise when environmental taxes are employedto encourage firms to take irreversible abatement decisions. Setting a high carbontax, for instance, would induce firms to invest in low-carbon technology,yet once investment has occurred the government can then reduce the carbontax to better achieve other objectives; lower energy prices, redistribution, andelectoral success. The resulting time inconsistency discourages firms from investingin the first place. We propose an institutional solution to this problem,adapted from the monetary policy literature; the commitment outcome canbe achieved through delegation to an ‘environmental policymaker’, akin to aconservative central banker....