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Carbon Taxes and Comparison of Trading Regimes in Fossil Fuels

In: Dynamic Optimization in Environmental Economics

Author

Listed:
  • Seiichi Katayama

    (Aichi Gakuin University)

  • Ngo Long

    (McGill University)

  • Hiroshi Ohta

    (Kobe University)

Abstract

We study a dynamic game involving a fossil fuel exporting cartel and a coalition of importing countries that imposes carbon taxes. We show that there exists a unique Nash equilibrium, where all countries use feedback strategies. We also obtain two Stackelberg equilibria, one where the exporting cartel is the leader, and one where the coalition of importing countries is the leader. Not surprisingly, the world welfare under the Nash equilibrium is lower than that under the social planning, even though both solutions have the same steady state. Comparison of the Stackelberg equilibria with the Nash equilibrium is performed numerically. All our numerical examples reveal that world welfare under the Nash equilibrium is higher than that under the Stackelberg game where the exporting cartel is the leader. The worst outcome for world welfare occurs when the importing coalition is the Stackelberg leader.

Suggested Citation

  • Seiichi Katayama & Ngo Long & Hiroshi Ohta, 2014. "Carbon Taxes and Comparison of Trading Regimes in Fossil Fuels," Dynamic Modeling and Econometrics in Economics and Finance, in: Elke Moser & Willi Semmler & Gernot Tragler & Vladimir M. Veliov (ed.), Dynamic Optimization in Environmental Economics, edition 127, pages 287-313, Springer.
    • Handle: RePEc:spr:dymchp:978-3-642-54086-8_13
    DOI: 10.1007/978-3-642-54086-8_13
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