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Strategic Carbon Taxation and Energy Pricing: The Role of Innovation

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  • Zhang, Xiao-Bing

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

Abstract

This paper investigates the strategic interactions between carbon taxation by a resource-consumers’ coalition and (wellhead) energy pricing by a producers’ cartel under possible innovation in a cheap carbon-free technology through a dynamic game. The arrival time of innovation is uncertain, but can be affected by the amount spent on R&D. The results show that the expectation of possible innovation decreases both the initial carbon tax and producer price, resulting in higher initial resource extraction or carbon emissions. Even though this 'green paradox' effect will appear in the cooperative case (no strategic interactions) as well, the presence of strategic interactions between resource producers and consumers can somewhat restrain such an effect. The optimal R&D to stimulate innovation is an increasing function of the initial CO2 concentration for both the resource consumers and a global planner. However, the resource consumers can over-invest in R&D (compared with the global efficient investment.

Suggested Citation

  • Zhang, Xiao-Bing, 2014. "Strategic Carbon Taxation and Energy Pricing: The Role of Innovation," Working Papers in Economics 589, University of Gothenburg, Department of Economics.
    • Handle: RePEc:hhs:gunwpe:0589
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    File URL: https://gupea.ub.gu.se/handle/2077/35655
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    References listed on IDEAS

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    More about this item

    Keywords

    Carbon taxation; Innovation; Uncertainty; Dynamic game;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q23 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Forestry
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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