Climate policy with tied hands: optimal resource taxation under implementation lags

Corrado Di Maria, Sjak Smulders, Edwin van der Werf

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In the presence of implementation lags, announced Pigouvian taxation leads to fossil fuel prices that are too low from society’s perspective. This results in excessive emissions and reduced incentives for green innovation. Such effects are compounded by the presence of pre-existing subsidies to fossil fuel use. We show that the intertemporal resource tax path may need to be modified to optimally take
into account the perverse incentives from policy lags and pre-existing policies. We find that it might be optimal to subsidize, rather than tax resource extraction at the instant of implementation.
Original languageEnglish
Pages (from-to)537–551
Number of pages15
JournalEnvironmental and Resource Economics
Issue number3
Early online date28 Nov 2016
Publication statusPublished - Mar 2017

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