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Abstract:
Preferences can change during a green transition as they are formed by social contexts. A carbon tax aimed at reducing greenhouse gas emissions faces the intertemporal trade-off that lower taxes and higher carbon emissions today increase immediate welfare but decrease welfare of future people. The implications of changing preferences over climate-friendly and fossil fuel-based consumption goods for this trade-off has not been previously characterized, however. We build on Besley and Persson (2023), who pioneered incorporating endogenous preferences into a model of political competition for the green transition. Building on their framework, we characterize the optimal policy intervention under endogenous preferences on such a transition. We find that the optimal tax on the polluting good starts high and subsequently declines, as preferences become greener. Ignoring changes in preferences in climate policy design leads to large welfare losses.
