Adverse Selection as a Policy Instrument: Unraveling Climate Change / Steve Cicala, David Hémous, Morten G. Olsen.

Format:

Book

Author/Creator:

Cicala, Steve.

Contributor:

National Bureau of Economic Research.

Hémous, David.

Olsen, Morten G.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30283.

NBER working paper series no. w30283

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

This paper applies principles of adverse selection to overcome obstacles that prevent the implementation of Pigouvian policies to internalize externalities. Focusing on negative externalities from production (such as pollution), we consider settings in which aggregate emissions are known, but individual contributions are unobserved by the government. We evaluate a policy that gives firms the option to pay a tax on their voluntarily and verifiably disclosed emissions, or pay an output tax based on the average rate of emissions among the undisclosed firms. The certification of relatively clean firms raises the output-based tax, setting off a process of unraveling in favor of disclosure. We derive sufficient statistics formulas to calculate the welfare of such a program relative to mandatory output or emissions taxes. We find that the voluntary certification mechanism would deliver significant gains over output-based taxation in two empirical applications: methane emissions from oil and gas fields, and carbon emissions from imported steel.

Notes:

Print version record

July 2022.