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Battle for Climate and Scarcity Rents: Beyond the Linear-Quadratic Case

Author

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  • Mark Kagan

    ()

  • Frederick Ploeg

    ()

  • Cees Withagen

    ()

Abstract

Industria imports oil, produces final goods and wishes to mitigate global warming. Oilrabia exports oil and buys final goods from the other country. Industria uses the carbon tax to impose an import tariff on oil and steal some of Oilrabia’s scarcity rent. Conversely, Oilrabia has monopoly power and sets the oil price to steal some of Industria’s climate rent. We analyze the relative speeds of oil extraction and carbon accumulation under these strategic interactions for various production function specifications and compare these with the efficient and competitive outcomes. We prove that for the class of HARA production functions, the oil price is initially higher and subsequently lower in the open-loop Nash equilibrium than in the efficient outcome. The oil extraction rate is thus initially too low and in later stages too high. The HARA class includes linear, loglinear and semi-loglinear demand functions as special cases. For non-HARA production functions, Oilrabia may in the open-loop Nash equilibrium initially price oil lower than the efficient level, thus resulting in more oil extraction and climate damages. We also contrast the open-loop Nash and efficient outcomes numerically with the feedback Nash outcomes. We find that the optimal carbon tax path in the feedback Nash equilibrium is flatter than in the open-loop Nash equilibrium. It turns out that for certain demand functions using the carbon tax as an import tariff may hurt consumers’ welfare as the resulting user cost of oil is so high that the fall in welfare wipes out the gain from higher tariff revenues. Copyright The Author(s) 2015

Suggested Citation

  • Mark Kagan & Frederick Ploeg & Cees Withagen, 2015. "Battle for Climate and Scarcity Rents: Beyond the Linear-Quadratic Case," Dynamic Games and Applications, Springer, vol. 5(4), pages 493-522, December.
  • Handle: RePEc:spr:dyngam:v:5:y:2015:i:4:p:493-522
    DOI: 10.1007/s13235-015-0154-2
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. van der Ploeg, Frederick, 2016. "Second-best carbon taxation in the global economy: The Green Paradox and carbon leakage revisited," Journal of Environmental Economics and Management, Elsevier, vol. 78(C), pages 85-105.
    2. Rick can der Ploeg, 2017. "Race to Burn the Last Ton of Carbon and the Risk of Stranded Assets," OxCarre Working Papers 201, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    3. Ray Chaudhuri, A. & Benchekroun, H. & Breton, Michele, 2018. "Mergers in Nonrenewable Resource Oligopolies and Environmental Policies," Discussion Paper 2018-030, Tilburg University, Center for Economic Research.
    4. Rick van der Ploeg, 2017. "Race to Burn the Last Ton of Carbon and the Risk of Stranded Assets," CESifo Working Paper Series 6793, CESifo Group Munich.

    More about this item

    Keywords

    Exhaustible resources; Hotelling rule; Efficiency ; Carbon tax; Climate rent; Differential game; Open-loop Nash equilibrium; Subgame-perfect Nash equilibrium ; HARA production functions; C73; H30; Q32; Q37; Q54;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • Q37 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Issues in International Trade
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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