The value of commitment and delegation for the control of greenhouse gas emissions

Paul Pichler, Gerhard Sorger

We analyze a stylized model of a world consisting of a large number of countries, which derive utility from energy consumption but suffer both from the emission of greenhouse gases (smog, black carbon, etc.) as well as from the external effects caused by climate change. The countries decide individually on investments in clean (i.e., emission free) technologies for energy production, whereas a supranational environmental authority decides for each country
on the maximally permitted amount of emissions of greenhouse gases. We demonstrate that the authority faces a dynamic inconsistency problem that leads to welfare losses. Yet these welfare losses can be kept small if the mandate for the authority penalizes the local cost of emissions very heavily but puts little or no weight at all on the cost of climate change.

Department of Economics
No. of pages
Publication date
Austrian Fields of Science 2012
502018 Macroeconomics, 502042 Environmental economics
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