Buying versus Leasing Fuel Deposits for Preservation

In a two‐period model with two groups of countries that extract, trade, and consume fossil fuels, a climate coalition fights against climate change by purchasing or leasing deposits to prevent their extraction and seeks to manipulate fuel prices in its favor. The policy of purchasing deposits is inefficient because it leaves the first‐period climate externality non‐internalized. By contrast, the deposit‐lease policy turns out to be efficient if it eliminates strategic action in the fuel markets. In an empirically calibrated economy, the coalition's welfare and total welfare are greater with the deposit‐lease policy than with the deposit‐purchase policy if the discount rate is smaller than 2.7 percent per annum.