Does the Adverse Announcement Effect of Climate Policy Matter? - A Dynamic General Equilibrium Analysis

Marie-Catherine Riekhof,Johannes Brrcker

doi:10.2139/ssrn.2818466

Abstract

We consider a carbon emissions tax announced today, but implemented after a known time-lag. Before implementation, the announcement induces higher emissions than without intervention. In welfare terms, this adverse announcement effect could more than outweigh the gain after tax implementation. We quantify a ‘critical lag’ such that a shorter (longer) implementation lag is a welfare gain (loss) over nointervention. We identify resource scarcity as the main driver for a short critical lag. The model is a global Ramsey Model extended by an exhaustible carbon resource and linked to a climate model.

Highlights

Mitigation of climate change is a key issue on any policy-maker’s agenda
The focus on the demand side of fossil fuels may lead to a ‘green paradox’ (Sinn 2008), i.e. to a situation where wellintentioned climate policies trigger an acceleration of climate change
An implementation lag leads to an adverse ‘announcement effect’: the owners of carbon resources anticipate the restriction on resource demand in the future

Summary

Introduction

Mitigation of climate change is a key issue on any policy-maker’s agenda. Most climate policies aim to reduce carbon emissions by restricting fossil fuel demand. The focus on the demand side of fossil fuels may lead to a ‘green paradox’ (Sinn 2008), i.e. to a situation where wellintentioned climate policies trigger an acceleration of climate change. An implementation lag leads to an adverse ‘announcement effect’: the owners of carbon resources anticipate the restriction on resource demand in the future. They are induced to extract more resources before implementation and to sell the extracted resources at a lower price than in a world without climate policy. The adverse announcement effect is well established in the literature and partly documented in the data It may have even already been triggered by the political and scientific debate on climate policy (Jensen et al 2015)

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