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

Listed author(s):
  • Strand, Jon

This paper provides a first analysis of a “policy bloc” of fossil fuel importers which implements an optimal climate policy, faces a (non-policy) fringe of other fuel importers, and an exporter bloc, and purchases offset from the fringe. We compare a carbon tax and a cap-and-trade scheme for the policy bloc, in either case accompanied by an efficient offset mechanism for reducing emissions in the fringe. The policy bloc is shown to prefer a tax over a cap, since only a tax reduces the fuel export price and by more when the policy bloc is larger. Offsets are also more favorable to the policy bloc under a tax than under a cap. The optimal offset price under a carbon tax is below the tax rate, while under a cap and free quota trading the offset price must equal the quota price. The domestic carbon and offset prices are both higher under a tax than under a cap when the policy bloc is small. When the policy bloc is larger, the offset price can be higher under a cap. Fringe countries gain by mitigation in the policy bloc, more under a carbon tax since the fuel import price is lower.

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File URL: http://www.sciencedirect.com/science/article/pii/S009506961300017X
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Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 66 (2013)
Issue (Month): 2 ()
Pages: 202-218

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Handle: RePEc:eee:jeeman:v:66:y:2013:i:2:p:202-218
DOI: 10.1016/j.jeem.2013.03.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622870

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