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Carbon Taxes in a Trading World

Author

Listed:
  • Seiichi KATAYAMA
  • Ngo Van LONG
  • Hiroshi OHTA

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 Van LONG & Hiroshi OHTA, 2013. "Carbon Taxes in a Trading World," GSICS Working Paper Series 26, Graduate School of International Cooperation Studies, Kobe University.
    • Handle: RePEc:kcs:wpaper:26
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    File URL: http://www.research.kobe-u.ac.jp/gsics-publication/gwps/2013-26.pdf
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    References listed on IDEAS

    as
    1. Kenji Fujiwara & Ngo Long, 2011. "Welfare Implications of Leadership in a Resource Market under Bilateral Monopoly," Dynamic Games and Applications, Springer, vol. 1(4), pages 479-497, December.
    2. Franz Wirl, 1995. "The exploitation of fossil fuels under the threat of global warming and carbon taxes: A dynamic game approach," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 5(4), pages 333-352, June.
    3. Karp, Larry, 1984. "Optimality and consistency in a differential game with non-renewable resources," Journal of Economic Dynamics and Control, Elsevier, vol. 8(1), pages 73-97, October.
    4. Myles R. Allen & David J. Frame & Chris Huntingford & Chris D. Jones & Jason A. Lowe & Malte Meinshausen & Nicolai Meinshausen, 2009. "Warming caused by cumulative carbon emissions towards the trillionth tonne," Nature, Nature, vol. 458(7242), pages 1163-1166, April.
    5. -, 2009. "The economics of climate change," Sede Subregional de la CEPAL para el Caribe (Estudios e Investigaciones) 38679, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Exhaustible Resource; Carbon Tax; Nash and Stackerberg Equilibria;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • Q34 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Natural Resources and Domestic and International Conflicts

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