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Demand- Versus Supply-Side Climate Policies with a Carbon Dioxide Ceiling

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  • Thomas Eichner
  • Gilbert Kollenbach
  • Mark Schopf

Abstract

In a Hotelling model with a climate coalition and a free-riding fringe, we compare demand-side and supply-side climate policies aimed at keeping CO$_2$ concentration below a ceiling equivalent to global warming of $2^\circ{\rm C}$. With the demand-side policy, the coalition caps its fuel demand. The corresponding allocation is intra-temporally distorted. With the supply-side policy, the coalition purchases deposits. The corresponding allocation is inter-temporally distorted and the fuel extraction path can be discontinuous. In an empirically calibrated economy, a medium-sized (the grand) coalition is stable with the demand-side (supply-side) policy. If the coalition acts strategically, the stable grand coalition implements first best.

Suggested Citation

  • Thomas Eichner & Gilbert Kollenbach & Mark Schopf, 2023. "Demand- Versus Supply-Side Climate Policies with a Carbon Dioxide Ceiling," The Economic Journal, Royal Economic Society, vol. 133(652), pages 1371-1406.
    • Handle: RePEc:oup:econjl:v:133:y:2023:i:652:p:1371-1406.
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    JEL classification:

    • F55 - International Economics - - International Relations, National Security, and International Political Economy - - - International Institutional Arrangements
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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