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Strategic climate policy with offsets and incomplete abatement : carbon taxes versus cap-and-trade

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  • Strand, Jon

Abstract

This paper provides a first analysis of optimal offset policies by a"policy bloc"of fossil fuel importers implementing a climate policy, facing a (non-policy) fringe of other importers, and a bloc of fuel exporters. The policy bloc uses either a carbon tax or a cap-and-trade scheme, jointly with a fully efficient offset mechanism for reducing emissions in the fringe. The policy bloc is then shown to prefer a tax over a cap-and-trade scheme, since 1) a tax extracts more rent as fuel exporters reduce the export price, and more so when the policy bloc is larger relative to the fringe; and 2) offsets are more favorable to the policy bloc under a tax than under a cap-and-trade scheme. The optimal offset price under a carbon tax is half the tax rate; under a cap-and-trade scheme the quota and offset price are equal. The domestic carbon and offset price are both higher under a tax than under a cap-and-trade scheme when the policy bloc is small; when it is larger the offset price can be higher under a cap-and-trade scheme. Fringe countries gain by mitigation in the policy bloc, and more under a carbon tax since the fuel import price is lower, and since the price obtained when selling offsets is often higher (always so for a large fringe).

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5675.

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Date of creation: 01 Jun 2011
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Handle: RePEc:wbk:wbrwps:5675

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Keywords: Climate Change Economics; Climate Change Mitigation and Green House Gases; Energy Production and Transportation; Markets and Market Access; Environment and Energy Efficiency;

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References

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  1. Rosendahl, Knut Einar & Strand, Jon, 2009. "Simple model frameworks for explaining inefficiency of the clean development mechanism," Policy Research Working Paper Series 4931, The World Bank.
  2. Jon Strand, 2007. "Technology Treaties and Fossil-Fuels Extraction," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 129-142.
  3. Frederick Van der Ploeg & Cees A. Withagen, 2010. "Is There Really a Green Paradox?," CESifo Working Paper Series 2963, CESifo Group Munich.
  4. Hans-Werner Sinn, 2007. "Public Policies against Global Warming," CESifo Working Paper Series 2087, CESifo Group Munich.
  5. Strand, Jon, 2010. "Taxes and caps as climate policy instruments with domestic and imported fuels," Policy Research Working Paper Series 5171, The World Bank.
  6. Hoel, Michael & Karp, Larry, 2001. "Taxes versus Quotas for a Stock Pollutant," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt5fx9p7kf, Department of Agricultural & Resource Economics, UC Berkeley.
  7. Santiago J. Rubio, 2005. "Tariff Agreements And Non-Renewable Resource International Monopolies: Prices Versus Quantitites," Working Papers. Serie AD 2005-10, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  8. Rubio, Santiago J. & Escriche, Luisa, 2001. "Strategic pigouvian taxation, stock externalities and polluting non-renewable resources," Journal of Public Economics, Elsevier, vol. 79(2), pages 297-313, February.
  9. Costello, Christopher & Karp, Larry, 2004. "Dynamic taxes and quotas with learning," Journal of Economic Dynamics and Control, Elsevier, vol. 28(8), pages 1661-1680, June.
  10. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
  11. Wirl, Franz, 2012. "Global warming: Prices versus quantities from a strategic point of view," Journal of Environmental Economics and Management, Elsevier, vol. 64(2), pages 217-229.
  12. Berger, Kjell & Fimreite, Oyvind & Golombek, Rolf & Hoel, Michael, 1992. "The oil market and international agreements on CO2 emissions," Resources and Energy, Elsevier, vol. 14(4), pages 315-336, December.
  13. 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.
  14. Jon Strand, 2010. "Taxes versus Cap-and-Trade in Climate Policy when only some Fuel Importers Abate," CESifo Working Paper Series 3233, CESifo Group Munich.
  15. Elin Berg & Snorre Kverndokk & Knut Einar Rosendahl, 1997. "Market Power, International CO2 Taxation and Oil Wealth," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 33-71.
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Cited by:
  1. Knut Einar Rosendahl & Jon Strand, 2014. "Emissions Trading with Offset Markets and Free Quota Allocations," CESifo Working Paper Series 4603, CESifo Group Munich.
  2. Lawrence H. Goulder & Andrew Schein, 2013. "Carbon Taxes vs. Cap and Trade: A Critical Review," NBER Working Papers 19338, National Bureau of Economic Research, Inc.

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