Steve Cicala (11/06/19)

Steve Cicala

University of Chicago

“Advantageous Selection as a Policy Instrument: Unraveling Climate Change”

Abstract: This paper applies principles of advantageous selection to overcome obstacles that prevent the implementation of Pigouvian policies to internalize externalities. Focusing on negative externalities from production (such as pollution), we evaluate settings in which aggregate emissions are known, but individual contributions are unobserved by the government. The government provides firms with the option to pay a tax on their voluntarily and verifiably disclosed emissions, or an output tax based on the average of 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 the conditions under which unraveling will yield an outcome close to the first best. We then implement our mechanism in an international setting with unilateral climate change policy as the motivation. We show how such a mechanism extends the reach of a carbon tax, and that the gains over a system of carbon tariffs depend on a small number of estimable parameters. Full Paper