Credible Carbon Policy

The paper sets out the credibility problem in carbon policy, provides a number of examples of non-credibility in recent energy policy, and identifies the costs of failing to address it. The time inconsistency of carbon policy—arising because of multiple objectives, the irreversibility of energy investments, and the scope for ex-post reneging on ex-ante commitments to set policy instruments, such as carbon taxes or emission permits, at appropriate levels—is set in a conceptual framework. Analogies with monetary policy are drawn, and a solution to the time-inconsistency problem is proposed through the establishment of an energy/carbon agency.