We study the impact of the 2022-2023 energy crisis in Germany. We collect 3 waves of panel data to measure how political attitudes change with increasing energy prices for households. Our difference-in-differences estimation exploits unique features of the German energy sector, which allows for a quasi-experimental design. We show that increases in electricity payments lead to a decline in support for democratic institutions, with effects intensifying over time. The study focuses on how economic shocks affect political attitudes. It has implications that range from climate policy to the rise of populism.

We study the relative merit of regulation by “prices vs. quantities” by assessing the instrument choice between carbon taxes and emissions trading systems from the perspective of public perceptions. In a stated-choice experiment across 15,000 respondents from seven European countries, we elicit how citizens perceive the (non-)economic properties of carbon taxation and emissions trading, and study how they are linked to public support. Our analysis is guided by value-based, reason-based and motivated reasoning approaches to public choice. While there is considerable cross-country variation in the appraisal of both instruments, treatments effects of instrument framing are sizeable: carbon taxes are consistently more often perceived as increasing the state budget, harming the economy, and increasing costs of living and production, and emissions trading is more often perceived as easy to evade. Our results suggests that public opinion on carbon pricing is primarily driven by perceptions around taxes being a 'tougher' measure.

We study the optimal taxation of carbon in a fiscal climate-economy model with incomplete markets. Our objective is twofold. First, we want to understand how the presence of inequality and uninsurable idiosyncratic income risk affects the optimal trajectory of climate policy, i.e. both its level and timing. Second, we want to understand how climate policy in turn affects the economy, i.e. the level of aggregate variables, redistribution, insurance provision, and welfare. To investigate these issues, we consider a Ramsey problem where the planner maximizes welfare by choosing the path of proportional taxes on capital and labor, transfers, and debt, as well as taxes on carbon emissions and energy production. We quantitatively study this Ramsey problem under various constraints over the choice of instruments, and highlight the trade-offs faced by a government seeking to jointly address inequality, imperfect insurance, and climate change.

Effective climate change mitigation requires green innovation, but not all projects have equal social value. We examine the role of innovation heterogeneity in a model where the policy maker cannot observe innovation quality and directly subsidize the socially most valuable green innovations. We find that carbon pricing works as an innovation screening device; this creates a premium on the optimal carbon price, raising it above the Pigouvian level. We identify conditions for perfect screening and generalize results to screening policies under alternative intellectual property regimes and complementary policies. A calibration reveals that screening can justify a carbon price that is up to three times the Pigouvian price.