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The carbon rent economics of climate policy

  • Kalkuhl, Matthias
  • Brecha, Robert J.

By reducing the demand for fossil fuels, climate policy can reduce scarcity rents for fossil resource owners. As mitigation policies ultimately aim to limit emissions, a new scarcity for “space” in the atmosphere to deposit emissions is created. The associated scarcity rent, or climate rent (that is, for example, directly visible in permit prices under an emission trading scheme) can be higher or lower than the original fossil resource rent. In this paper, we analyze analytically and numerically the impact of mitigation targets, resource availability, backstop costs, discount rates and demand parameters on fossil resource rents and the climate rent. We assess whether and how owners of oil, gas and coal can be compensated by a carbon permit grandfathering rule. One important finding is that reducing (cumulative) fossil resource use could actually increase scarcity rents and benefit fossil resource owners under a permit grandfathering rule. For our standard parameter setting overall scarcity rents under climate policy increase slightly. While low discount rates of resource owners imply higher rent losses due to climate policies, new developments of reserves or energy efficiency improvements could more than double scarcity rents under climate policy. Another important implication is that agents receiving the climate rent (regulating institutions or owners of grandfathered permits) could influence the climate target such that rents are maximized, rather than to limit global warming to a socially desirable level. For our basic parameter setting, rents would be maximized at approximately 650GtC emissions (50% of business-as-usual emissions) implying a virtual certainty of exceeding a 2°C target and a likelihood of 4°C warming.

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Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 39 (2013)
Issue (Month): C ()
Pages: 89-99

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Handle: RePEc:eee:eneeco:v:39:y:2013:i:c:p:89-99
Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

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  1. Martin Stürmer & Gregor Schwerhoff, 2012. "Non-Renewable but Inexhaustible – Resources in an Endogenous Growth Model," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2012_09, Max Planck Institute for Research on Collective Goods.
  2. Thomas Eichner & Rüdiger Pethig, 2009. "Carbon Leakage, the Green Paradox and Perfect Future Markets," CESifo Working Paper Series 2542, CESifo Group Munich.
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  5. Geoffrey Heal, 2009. "Climate Economics: A Meta-Review and Some Suggestions for Future Research," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 3(1), pages 4-21, Winter.
  6. Bård Harstad, 2010. "Buy coal? Deposit markets prevent carbon leakage," NBER Working Papers 16119, National Bureau of Economic Research, Inc.
  7. William D. Nordhaus, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 686-702, September.
  8. Dahl, Carol & Sterner, Thomas, 1991. "Analysing gasoline demand elasticities: a survey," Energy Economics, Elsevier, vol. 13(3), pages 203-210, July.
  9. Sinn, Hans-Werner, 2008. "Public policies against global warming: A supply side approach," Munich Reprints in Economics 19638, University of Munich, Department of Economics.
  10. Martin L. Weitzman, 2011. "Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 5(2), pages 275-292, Summer.
  11. Edwin van der Werf & Corrado Di Maria, 2011. "Unintended Detrimental Effects of Environmental Policy: The Green Paradox and Beyond," CESifo Working Paper Series 3466, CESifo Group Munich.
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