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Taxes versus Cap-and-Trade in Climate Policy when only some Fuel Importers Abate

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  • Jon Strand

Abstract

I study climate policy choices for a “policy bloc” of fuel-importers, when a “fringe” of other fuel importers have no climate policy, fuel exporters consume no fossil fuels, and importers produce no such fuels. The policy bloc and exporter blocs act strategically in fossil fuel markets. When the policy bloc sets a carbon tax, the fuel import price set by the exporter is reduced, and more so when the policy bloc is larger. The carbon tax then serves to extract the exporter’s rent. The fringe also gains from reduced fuel import prices, and gains more when the policy bloc is larger. When the policy bloc sets an emissions cap, fuel demand becomes less price elastic. In response, a monopolistic exporter sets the fuel export price higher than under a tax, which hurts both the policy bloc and the fringe. This effect can be stronger when the policy bloc is larger, so that the fringe loses when the policy bloc is larger, opposite to the tax policy case. Overall, a cap is inferior to a tax for fossil fuel importers, both those that implement a climate policy, and those that do not.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3233.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3233

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Related research

Keywords: climate policy; carbon taxes; cap-and-trade schemes; carbon emissions; strategic trade policy;

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References

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  1. Hans-Werner Sinn, 2007. "Public Policies against Global Warming," CESifo Working Paper Series 2087, CESifo Group Munich.
  2. Michael Hoel, 2010. "Is there a Green Paradox?," CESifo Working Paper Series 3168, CESifo Group Munich.
  3. Hoel, Michael & Karp, Larry, 2002. "Taxes versus quotas for a stock pollutant," Resource and Energy Economics, Elsevier, Elsevier, vol. 24(4), pages 367-384, November.
  4. Liski, Matti & Tahvonen, Olli, 2004. "Can carbon tax eat OPEC's rents?," Journal of Environmental Economics and Management, Elsevier, vol. 47(1), pages 1-12, January.
  5. van der Ploeg, Frederick & Withagen, Cees, 2012. "Is there really a green paradox?," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 342-363.
  6. Berger, Kjell & Fimreite, Oyvind & Golombek, Rolf & Hoel, Michael, 1992. "The oil market and international agreements on CO2 emissions," Resources and Energy, Elsevier, Elsevier, vol. 14(4), pages 315-336, December.
  7. Santiago J. Rubio, 2005. "Tariff Agreements And Non-Renewable Resource International Monopolies: Prices Versus Quantitites," Working Papers. Serie AD, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) 2005-10, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  8. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, Elsevier, vol. 85(3), pages 409-434, September.
  9. Strand, Jon, 2010. "Taxes and caps as climate policy instruments with domestic and imported fuels," Policy Research Working Paper Series 5171, The World Bank.
  10. Santiago J. Rubio & Luisa Escriche, 1998. "- Strategic Pigouvian Taxation, Stock Externalities And Polluting Non-Renewable Resources," Working Papers. Serie EC, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) 1998-23, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  11. Costello, Christopher & Karp, Larry, 2004. "Dynamic taxes and quotas with learning," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(8), pages 1661-1680, June.
  12. Elin Berg & Snorre Kverndokk & Knut Einar Rosendahl, 1997. "Market Power, International CO2 Taxation and Oil Wealth," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 4), pages 33-71.
  13. Jon Strand, 2007. "Technology Treaties and Fossil-Fuels Extraction," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 4), pages 129-142.
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Cited by:
  1. Thomas Eichner & Rüdiger Pethig, 2014. "Self-enforcing international environmental agreements and trade: taxes versus caps," Volkswirtschaftliche Diskussionsbeiträge, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht 165-14, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
  2. Strand, Jon, 2011. "Strategic climate policy with offsets and incomplete abatement : carbon taxes versus cap-and-trade," Policy Research Working Paper Series 5675, The World Bank.
  3. Wirl, Franz, 2014. "Taxes versus permits as incentive for the intertemporal supply of a clean technology by a monopoly," Resource and Energy Economics, Elsevier, Elsevier, vol. 36(1), pages 248-269.

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