Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2025-07-25
Number: 25-043/VI
Author-Name: Sweder van Wijnbergen
Author-Workplace-Name: University of Amsterdam and Tinbergen Institute
Title: Should Carbon taxes be Preannounced? On Irreversible Investment, Real Options and Carbon Taxes
Abstract: Climate change and its two-way relation with economic activity is stochastic and so is therefore the optimal tax internalizing the climate externality. But with capital irreversibility a stochastic time path for carbon prices slows down the reallocation from brown to green sectors because waiting then acquires an option value. We show that it is optimal to pre-announce a time path for future carbon taxes, eliminating the option value of waiting at the cost of suboptimality of the pre-announced taxes at the time they apply. We analyse for how long carbon taxes should be pre-announced and which factors influence that timespan.
Classification-JEL: 
Keywords: Carbon taxes, Social Cost of Carbon, Irreversible Capital, Real Options
File-URL: https://papers.tinbergen.nl/25043.pdf
File-Format: application/pdf
File-Size: 813.383 bytes
Handle: RePEc:tin:wpaper:20250043