Strategic climate policy with offsets and incomplete abatement : carbon taxes versus cap-and-trade
AbstractThis 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 InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 5675.
Date of creation: 01 Jun 2011
Date of revision:
Climate Change Economics; Climate Change Mitigation and Green House Gases; Energy Production and Transportation; Markets and Market Access; Environment and Energy Efficiency;
This paper has been announced in the following NEP Reports:
- NEP-AGR-2011-06-11 (Agricultural Economics)
- NEP-ALL-2011-06-11 (All new papers)
- NEP-ENE-2011-06-11 (Energy Economics)
- NEP-ENV-2011-06-11 (Environmental Economics)
- NEP-REG-2011-06-11 (Regulation)
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