On effects of present-bias on carbon emission patterns towards a net zero target

TL;DR

This paper models how present-biased decision-makers influence carbon emission patterns and evaluates policies like carbon taxes to achieve net zero targets, highlighting the impact of bias and policy thresholds.

Contribution

It introduces a stochastic control framework incorporating present-bias into carbon emission policy modeling, extending methods from insurance risk theory.

Findings

Higher present-bias leads to increased emissions.

Greater sustainability awareness reduces emissions.

Carbon tax effectiveness diminishes beyond a certain level.

Abstract

This paper explores the optimal policy for using an allocated carbon emission budget over time with the objective to maximize profit, by explicitly taking into account present-biased preferences of decision-makers, accounting for time-inconsistent preferences. The setup can be adapted to be applicable for either a (present-biased) individual or also for a company which seeks a balance between production and emission schedules. In particular, we use and extend stochastic control techniques developed for optimal dividend strategies in insurance risk theory for the present purpose. The approach enables a quantitative analysis to assess the effects of present-bias, of sustainability awareness, and the efficiency of a potential carbon tax in a simplified model. In some numerical implementations, we illustrate in what way a higher degree of present-bias leads to excess emission patterns, while placing greater emphasis on sustainability reduces carbon emissions. Furthermore, we show that for low levels of carbon tax, its increase has a positive effect on curbing emissions, while beyond a certain threshold that marginal impact gets considerably weaker.