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The Fossil Endgame: Strategic Oil Price Discrimination and Carbon Taxation

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  • Wie, Jiegen
  • Wennlock, Magnus
  • Johansson, Daniel J.A.
  • Sterner, Thomas
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    Abstract

    This paper analyzes how fossil fuel-producing countries can counteract climate policy. We analyze the exhaustion of oil resources and the subsequent transition to a backstop technology as a strategic game between the consumers and producers of oil, which we refer to simply as “OECD” and “OPEC,” respectively. The consumers, OECD, derive benefits from oil, but worry about climate effects from carbon dioxide emissions. OECD has two instruments to manage this: it can tax fuel consumption and decide when to switch to a carbon-neutral backstop technology. The tax reduces climate damage and also appropriates some of the resource rent. OPEC retaliates by choosing a strategy of price discrimination, subsidizing oil in its domestic markets. The results show that price discrimination enables OPEC to avoid some of the adverse consequences of OECD’s fuel tax and its switch to the backstop technology by consuming a larger share of the oil in its own domestic markets. Our results suggest that persuading fossil exporters to stop subsidizing domestic consumption will be difficult.

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    Bibliographic Info

    Paper provided by Resources For the Future in its series Discussion Papers with number dp-11-26.

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    Date of creation: 19 Sep 2011
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    Handle: RePEc:rff:dpaper:dp-11-26

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    Related research

    Keywords: dynamic games; stock externalities; carbon tax; non-renewable resources; energy subsidies;

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    Cited by:
    1. Christoph Böhringer & Knut Einar Rosendahl & Jan Schneider, 2013. "Unilateral Climate Policy: Can OPEC resolve the Leakage Probem?," Working Papers V-355-13, University of Oldenburg, Department of Economics, revised Mar 2013.

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