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The Grey Paradox: How fossil-fuel owners can benefit from carbon taxation

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  • Coulomb, Renaud
  • Henriet, Fanny

Abstract

This paper considers the distributional impact of optimal carbon taxation on fossil-fuel owners. A carbon-emitting exhaustible resource competes with a dirtier abundant resource and a clean backstop. A time-dependent carbon tax is set to optimally use these resources under a cap constraint over CO2 atmospheric concentration. As the cap is tightened, the dirtier resource becomes less competitive compared to the exhaustible resource (the “competition effect”), but the timing and duration of extraction of the exhaustible resource is modified (the “timing effect”). We provide analytical expressions of these effects, and determine conditions over size of reserves, pollution contents, extraction costs and demand elasticity such that the exhaustible-resource owners’ profits increase as the ceiling is tightened. Calibrations for the transport and power sectors suggest that the profits of conventional-oil and natural-gas owners increase compared to a baseline without regulation for plausible carbon-ceiling values.

Suggested Citation

  • Coulomb, Renaud & Henriet, Fanny, 2018. "The Grey Paradox: How fossil-fuel owners can benefit from carbon taxation," Journal of Environmental Economics and Management, Elsevier, vol. 87(C), pages 206-223.
  • Handle: RePEc:eee:jeeman:v:87:y:2018:i:c:p:206-223
    DOI: 10.1016/j.jeem.2017.07.001
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    Cited by:

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    2. Okullo, Samuel J. & Reynès, Frédéric & Hofkes, Marjan W., 2021. "(Bio-)Fuel mandating and the green paradox," Energy Economics, Elsevier, vol. 95(C).
    3. Akkaya Sahin & Bakkal Ufuk, 2020. "Carbon Leakage Along with the Green Paradox Against Carbon Abatement? A Review Based on Carbon Tax," Folia Oeconomica Stetinensia, Sciendo, vol. 20(1), pages 25-44, June.
    4. Sagasta Amagoia & Usategui José M., 2018. "Timing of Emissions and Effects of Emission Taxes in Durable-Goods Oligopolies," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 18(4), pages 1-21, October.
    5. Fanny Henriet & Katheline Schubert, 2019. "Is Shale Gas a Good Bridge to Renewables? An Application to Europe," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 72(3), pages 721-762, March.
    6. Renaud Coulomb & Fanny Henriet & Léo Reitzmann, 2021. "'Bad' Oil, 'Worse' Oil and Carbon Misallocation," PSE Working Papers halshs-03244647, HAL.
    7. Kim, Jung-Hun & Oh, Jeong-Ik & Tsang, Yiu Fai & Park, Young-Kwon & Lee, Jechan & Kwon, Eilhann E., 2020. "CO2-assisted catalytic pyrolysis of digestate with steel slag," Energy, Elsevier, vol. 191(C).
    8. Renaud Coulomb & Oskar Lecuyer & Adrien Vogt-Schilb, 2019. "Optimal Transition from Coal to Gas and Renewable Power Under Capacity Constraints and Adjustment Costs," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(2), pages 557-590, June.
    9. van der Ploeg, Frederick & Rezai, Armon, 2020. "The risk of policy tipping and stranded carbon assets," Journal of Environmental Economics and Management, Elsevier, vol. 100(C).
    10. Thomas Eichner & Rüdiger Pethig, 2021. "Unilateral Phase-Out of Coal to Power in an Emissions Trading Scheme," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 80(2), pages 379-407, October.

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    More about this item

    Keywords

    Carbon taxation; Externality; Global warming; Non-renewable resources; OPEC;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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