Wegener Center Common Space

Believe me when I say green! Heterogeneous expectations and climate policy uncertainty (Working paper with F. Lamperti and R. Terranova, August 2023)

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.

Emanuele Campiglio is Associate Professor at the University of Bologna. He is also Scientist at the RFF-CMCC European Institute on Economics and the Environment (EIEE) and Visiting Fellow at the London School of Economics and Political Science (LSE). Previously, he was Assistant Professor at the Vienna University of Economics and Business (WU). His research interests include environmental macroeconomics, transition modelling, sustainable finance, growth theory and the political economy of sustainability transitions.

He is the recipient of a 5-year European Research Council (ERC) Starting Grant for the project SMOOTH (Sustainable finance for a smooth low-carbon transition). The aim of SMOOTH is to study the dynamic links between macro-financial systems, climate change and the transition to a low-carbon society; and to contribute to the design of policies directed at achieving a rapid and smooth decarbonisation.