Believe me when I say green! Heterogeneous expectations and climate policy uncertainty
University of Bologna
Abstract: We develop a dynamic model where heterogeneous firms take investment decisions depending
on their beliefs on future carbon prices. A policy-maker announces a forward-looking tax
schedule but can default on its plans if perceived transition risks are high, thus affecting its
credibility in running climate policy. We show that (i) weak climate policy commitment can
lead to the emergence of a ‘high-carbon trap’, especially in front of ambitious announcements;
(ii) the presence of behavioural frictions – both in capital investment choices and in the assessment
of the policy-maker’s credibility – has strong non-linear effects on the transition dynamics.
We identify conditions leading to a successful transition and provide a quantitative application
for the EU economy.
Co-Authors: Francesco Lampertib, and Roberta Terranovab
Dates et heure