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Unilateral Climate Policy, Asymmetric Backstop Adoption, and Carbon Leakage in a Two-Region Hotelling Model

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  • Edwin van der Werf

Abstract

We study backstop adoption and carbon dioxide emission paths in a two-region model with unilateral climate policy and non-renewable resource consumption. The regions have an equal endowment of the internationally tradable resource and a backstop technology. We first study the case of a unilateral stock constraint (e.g. a 450 ppmv carbon dioxide concentration target), and show that the non-abating region makes the final switch to the backstop before the abating region does, though the latter region has two disjoint phases of backstop use if its marginal cost is sufficiently low. Furthermore, we show that the abating region has an inverse N-shaped emission path, with growing emissions in the period for which the ceiling is binding. In addition, there is a phase in which this region has a positive carbon price, but higher emissions than the non-abating region. With a global intertemporal carbon budget instead of a stock constraint, the order of definite backstop adoption is reversed and the abating region’s emissions are always lower. We also show that unilateral climate policy does not lead to international carbon leakage.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2907.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_2907

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Keywords: climate policy; non-renewable resources; backstop technology; carbon leakage; unilateral climate policy;

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  1. Hoel, Michael & Kverndokk, Snorre, 1996. "Depletion of fossil fuels and the impacts of global warming," Resource and Energy Economics, Elsevier, Elsevier, vol. 18(2), pages 115-136, June.
  2. CHAKRAVORTY Ujjayant & MOREAUX Michel & TIDBALL Mabel, 2006. "Ordering the Extraction of Polluting Nonrenewable Resources," LERNA Working Papers, LERNA, University of Toulouse 06.19.212, LERNA, University of Toulouse.
  3. Hans-Werner Sinn, 2007. "Public Policies against Global Warming," CESifo Working Paper Series 2087, CESifo Group Munich.
  4. Chakravorty, Ujjayant & Magné, Bertrand & Moreaux, Michel, 2005. "A Hotelling Model with a Ceiling on the Stock of Pollution," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 368, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. Léonard,Daniel & Long,Ngo van, 1992. "Optimal Control Theory and Static Optimization in Economics," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521337465.
  6. Thomas Eichner & Rüdiger Pethig, 2009. "Carbon leakage, the green paradox and perfect future markets," Volkswirtschaftliche Diskussionsbeiträge, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht 136-09, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
  7. Jean-Marc Burniaux & Joaquim Oliveira Martins, 2000. "Carbon Emission Leakages: A General Equilibrium View," OECD Economics Department Working Papers 242, OECD Publishing.
  8. Hoel, Michael, 1991. "Global environmental problems: The effects of unilateral actions taken by one country," Journal of Environmental Economics and Management, Elsevier, vol. 20(1), pages 55-70, January.
  9. Bohm Peter, 1993. "Incomplete International Cooperation to Reduce CO2 Emissions: Alternative Policies," Journal of Environmental Economics and Management, Elsevier, vol. 24(3), pages 258-271, May.
  10. Withagen, C.A.A.M., 1994. "Pollution and exhaustibility of fossil fuels resource," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3107033, Tilburg University.
  11. Corrado Di Maria & Sjak Smulders & Edwin van der Werf, 2008. "Absolute Abundance and Relative Scarcity: Announced Policy, Resource Extraction, and Carbon Emissions," Working Papers, Fondazione Eni Enrico Mattei 2008.92, Fondazione Eni Enrico Mattei.
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