Time-consistent environmental policy and optimal delegation, Discussion paper 175

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