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The impact of green preferences on the relevance of history versus expectations

Published online by Cambridge University Press:  18 June 2019

Andreas Schaefer  and
Anna Stünzi
Andreas Schaefer
Affiliation:
Department of Economics, University of Bath, BathUnited Kingdom CER-ETH Center of Economic Research, ETH Zurich, Zurich, Switzerland
Anna Stünzi*
Affiliation:
CER-ETH Center of Economic Research, ETH Zurich, Zurich, Switzerland
*
*E-mail: [email protected]
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Abstract

In an overlapping generations model with multiple steady states, we analyse the impact of endogenous environmental policies on the relevance of history and expectations for the equilibrium selection. In a polluting regime, environmental preferences cause an increasing energy tax which raises the risk that the economy transitions to the inferior equilibrium under pessimistic expectations. However, higher environmental preferences imply an earlier switch to the clean energy regime. Then, the conflict between production and environmental preferences is resolved and the prospects of selecting the superior equilibrium improve, since positive expectations become more relevant. In an empirical analysis we find that people with environmental preferences tend to have more optimistic expectations about economic development. Using these findings to analyse the steady-state dynamics implies that agents with environmental preferences support higher energy taxes and switch to clean production more quickly. Due to their optimism, the likelihood of reaching the superior stable steady state increases.

Keywords

Endogenous taxationexpectationsgreen preferencesmultiple equilibriaQ43O44Q50O11
Type
Research Article
Information
Environment and Development Economics , Volume 24 , Special Issue 6: The Economics of Climate Change and Sustainability (Part A) , December 2019 , pp. 583 - 607
Copyright
Copyright © Cambridge University Press 2019 

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