The paper sets out the credibility problem in carbon policy, provides a number of examples of non-credibility in recent energy policy, and identifies the costs of failing to address it. The time inconsistency of carbon policy – arising because of multiple objectives, the irreversibility of energy investments, and the scope for ex-post reneging on ex-ante commitments to set policy instruments, such as carbon taxes or emission permits, at appropriate levels – is set in a conceptual framework. Analogies with monetary policy are drawn, and a solution to the time-inconsistency problem is proposed through the establishment of an energy/carbon agency.
