Climate policy under political pressure

Abstract

It is widely acknowledged that there is an urgent need for policies that can reduce greenhouse gas emissions. Yet, the policies implemented by governments are far from sufficient to reach their long-term climate targets. In this paper, we propose a theoretical framework to study the implications of political pressure on optimal climate policy. A key feature of the framework is its ability to capture dynamic inconsistency, which naturally arises from the long time horizon of climate policies and their susceptibility to modifications due to political pressure. Our findings offer a new rationale for why green lobbying can make pollution regulation less stringent. We also show that political pressure from the polluting sector leads to a higher rate of clean energy investment chosen by the government and can shift the energy mix towards renewables in the long run. Similarly, this long-run shift can be caused by political pressure from members of the public who care only about immediate consumption.