Believe me when I say green! Heterogeneous expectations and climate policy uncertainty

The presence of behavioural frictions and heterogeneity - both in capital investment choices and in the assessment of the policy-maker’s credibility - has strong non-linear effects on the tran- sition dynamics and the emergence of ‘high-carbon traps’. [...] In the climate/energy policy sphere, examples include the rapid and sometimes retroactive withdrawal from clean energy subsidies in Europe (Sendstad et al., 2022); the introduction and subsequent repeal of a carbon tax in Australia (Crowley, 2017); the troubled relationship of the US with the Paris Agreement (Urpelainen and Van de Graaf, 2018); the recalibration of French fiscal policy after the G. [...] 6When using the expression ‘opinion polarisation’, we refer to the difference between the two system of beliefs, regardless of the size of the two populations. [...] On the other hand, c = 0 represents the case of a policy-maker fully committed to the reduction of transition risks and willing to reduce the tax to a floor level of τ̄t(1− πt).10 3 Analytical results In this section, we explore the analytical properties of the model. [...] Proposition 4 identifies a sufficient condition: it states that the lower the policy-maker’s com- mitment and the higher firms’ belief responsiveness β, the less ambitious the policy announcement can be to guarantee the uniqueness of the low-carbon steady state.15 The tax target implied in Proposition 4 can be interpreted as a safe threshold, below which the equilibrium is unique and able to gener.