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The Grey Paradox: How Oil Owners Can Benefit From Carbon Regulation

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  • Renaud Coulomb

    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

  • Fanny Henriet

    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

Abstract

This paper studies how oil owners can benefit from carbon taxation. We build a Hotelling-like model with three energy resources: oil (exhaustible, polluting), coal (non exhaustible, very polluting) and solar energy (non exhaustible, non polluting). The CO2 concentration must be kept under a carbon ceiling. The optimal extraction path is decentralized by a tax on emissions, and tax revenues are not redistributed. We characterize the different extraction paths. We focus on the case where both oil and coal are extracted and oil gets exhausted. When oil is cheaper to extract than coal, if oil is sufficiently scarce, or if the extraction cost of oil is close enough to the extraction cost of coal or if its pollution content is low enough, or if the demand elasticity is low enough, the profits of oil owners will increase when the carbon regulation is tightened. When oil is more expensive to extract than coal, and both resources are used and oil exhausted, tightening the carbon regulation increases the oil profits.

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Bibliographic Info

Paper provided by HAL in its series PSE Working Papers with number hal-00818350.

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Date of creation: May 2014
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Handle: RePEc:hal:psewpa:hal-00818350

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Related research

Keywords: Optimal Taxation ; Carbon Regulation ; Global Warming ; Nonrenewable Resources ; OPEC; Fossil Fuels ; Energy Markets;

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References

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  1. 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.
  2. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 41(4), pages 477-91, October.
  3. Verleger, Philip K, Jr, 1982. "The Determinants of Official OPEC Crude Prices," The Review of Economics and Statistics, MIT Press, vol. 64(2), pages 177-82, May.
  4. Daniel J.A. Johansson & Christian Azar & Kristian Lindgren & Tobias A. Persson , 2009. "OPEC Strategies and Oil Rent in a Climate Conscious World," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 3), pages 23-50.
  5. Ujjayant Chakravorty & Bertrand Magne & Michel Moreaux, 2006. "A Hotelling model with a ceiling on the stock of pollution," Working Papers 25547, Institut National de la Recherche Agronomique, France.
  6. Griffin, James M, 1985. "OPEC Behavior: A Test of Alternative Hypotheses," American Economic Review, American Economic Association, American Economic Association, vol. 75(5), pages 954-63, December.
  7. Chakravorty, Ujjayant & Moreaux, Michel & Tidball, Mabel, 2006. "Ordering the Extraction of Polluting Nonrenewable Resources," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 415, Institut d'Économie Industrielle (IDEI), Toulouse.
  8. Hans-Werner Sinn, 2008. "Public policies against global warming: a supply side approach," International Tax and Public Finance, Springer, Springer, vol. 15(4), pages 360-394, August.
  9. Strand, Jon, 2010. "Optimal fossil-fuel taxation with backstop technologies and tenure risk," Energy Economics, Elsevier, Elsevier, vol. 32(2), pages 418-422, March.
  10. Bergstrom, Theodore C, 1982. "On Capturing Oil Rents with a National Excise Tax," American Economic Review, American Economic Association, American Economic Association, vol. 72(1), pages 194-201, March.
  11. Frederick van der Ploeg & Cees Withagen, 2011. "Optimal Carbon Tax with a Dirty Backstop - Oil, Coal, or Renewables?," CESifo Working Paper Series 3334, CESifo Group Munich.
  12. Carol Dahl & Mine Yucel, 1991. "Testing Alternative Hypotheses of Oil Producer Behavior," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 4), pages 117-138.
  13. Clifton T. Jones, 1990. "OPEC Behaviour Under Falling Prices: Implications For Cartel Stability," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 3), pages 117-130.
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Cited by:
  1. Oskar Lecuyer & Adrien Vogt-Schilb, 2014. "Assessing and Ordering Investment in Polluting Fossil-fueled and Zero-carbon Capital," Working Papers 2014.05, FAERE - French Association of Environmental and Resource Economists, revised May 2014.
  2. repec:hal:wpaper:hal-00866442 is not listed on IDEAS
  3. repec:hal:wpaper:hal-00850680 is not listed on IDEAS
  4. repec:hal:ciredw:hal-00850680 is not listed on IDEAS

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