Taking Time Seriously:

Implications for Optimal Climate Policy

Michael Grubb, Rutger-Jan Lange, Nicolas Cerkez, Pablo Salas, Jean-Francois Mercure, and Ida Sognnaes

12 March, 2021

Abstract

Induced innovation and associated issues of path dependence and inertia are of critical importance in the transition to a carbon free economy. We develop a model that, instead of modelling these processes themselves, models the implications of these characteristics and in the process allows us to shed a more nuanced light on this transition phase, an often neglected task. The resulting policy recommendations emphasize the advantages of immediate action and show under what conditions optimal policy might differ from one sector to another. The model thus generates important and policy- relevant insights while seriously considering transition dynamics.

(JEL Codes: C61, O30, Q30, Q42, Q43, Q54, Q58)