Committing to Decarbonize

Abstract

Climate targets are key for focusing global efforts to limit anthropogenic climate change. Yet, they induce a time-consistency problem in that current decision makers set (ambitious) targets and leave costly abatement to future generations. We develop a reduced-form climate-economy integrated assessment model, and compare naive and sophisticated climate policies. We also differentiate between immediate and durable emission reduction measures. Our findings demonstrate that naive decision makers consistently weaken climate stabilization targets, resulting in an equilibrium that misses the initial proposal. Sophisticated decision makers foresee the weakened outcome, and invest more in durable abatement measures in order to incentivize future decision makers to continue emission reduction efforts. Our results indicate that effective climate policy goes beyond the carbon price; it also involves strategic selection of abatement measures.