Siegmeier, J.
Keeping Pigou on tracks: second-best combinations of carbon pricing and infrastructure provision
in MCC Working Paper 2/2016, 17.02.2016
Arbeitspapiere
Infrastructure plays a key role for decarbonization: when long-lived public infrastructures (for example roads) complement private goods (cars), they may perpetuate carbon-intensive demand patterns and technologies far into the future. Thus, climate policy must combine 'direct' measures such as a carbon tax with shifts in public investment (in the transport example, away from roads and towards infrastructure for public and non-motorized transport).
However, the composition of infrastructure supply changes slowly, and carbon taxation may be politically constrained. This paper analyzes if one instrument should be strengthened if the other is restricted. It is shown that the opposite may be optimal: Intuitively, if no adequate clean infrastructure is provided, polluting should also be penalized less (and vice versa), unless welfare gains from higher environmental quality are very strong.
More precisely, for non-separable public and private goods entering utility, general second-best conditions are derived and applied to a speci c utility function. A constraint on public spending composition leaves the (Pigouvian) tax rule unchanged, while a constraint on taxation implies that the composition of public pending now also addresses the environmental externality. Nevertheless, the second-best level of either policy instrument is below its first-best when `dirty' private goods are suciently important in utility.
