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Taxes versus Cap-and-Trade in Climate Policy when only some Fuel Importers Abate

  • Jon Strand

I study climate policy choices for a “policy bloc” of fuel-importers, when a “fringe” of other fuel importers have no climate policy, fuel exporters consume no fossil fuels, and importers produce no such fuels. The policy bloc and exporter blocs act strategically in fossil fuel markets. When the policy bloc sets a carbon tax, the fuel import price set by the exporter is reduced, and more so when the policy bloc is larger. The carbon tax then serves to extract the exporter’s rent. The fringe also gains from reduced fuel import prices, and gains more when the policy bloc is larger. When the policy bloc sets an emissions cap, fuel demand becomes less price elastic. In response, a monopolistic exporter sets the fuel export price higher than under a tax, which hurts both the policy bloc and the fringe. This effect can be stronger when the policy bloc is larger, so that the fringe loses when the policy bloc is larger, opposite to the tax policy case. Overall, a cap is inferior to a tax for fossil fuel importers, both those that implement a climate policy, and those that do not.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3233.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3233
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  1. Hans-Werner Sinn, 2007. "Public Policies against Global Warming," NBER Working Papers 13454, National Bureau of Economic Research, Inc.
  2. Strand, Jon, 2010. "Taxes and caps as climate policy instruments with domestic and imported fuels," Policy Research Working Paper Series 5171, The World Bank.
  3. Michael Hoel, 2010. "Is there a Green Paradox?," CESifo Working Paper Series 3168, CESifo Group Munich.
  4. Santiago J. Rubio, 2005. "Tariff Agreements And Non-Renewable Resource International Monopolies: Prices Versus Quantitites," Working Papers. Serie AD 2005-10, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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  8. van der Ploeg, Frederick & Withagen, Cees, 2012. "Is there really a green paradox?," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 342-363.
  9. Santiago J. Rubio & Luisa Escriche, 1998. "- Strategic Pigouvian Taxation, Stock Externalities And Polluting Non-Renewable Resources," Working Papers. Serie EC 1998-23, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  10. Hoel, Michael & Karp, Larry, 2002. "Taxes versus quotas for a stock pollutant," Resource and Energy Economics, Elsevier, vol. 24(4), pages 367-384, November.
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  12. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
  13. Frederick Van der Ploeg & Cees A. Withagen, 2010. "Is There Really a Green Paradox?," CESifo Working Paper Series 2963, CESifo Group Munich.
  14. Hans-Werner Sinn, 2007. "Public Policies against Global Warming," CESifo Working Paper Series 2087, CESifo Group Munich.
  15. Berger, Kjell & Fimreite, Oyvind & Golombek, Rolf & Hoel, Michael, 1992. "The oil market and international agreements on CO2 emissions," Resources and Energy, Elsevier, vol. 14(4), pages 315-336, December.
  16. Liski, Matti & Tahvonen, Olli, 2004. "Can carbon tax eat OPEC's rents?," Journal of Environmental Economics and Management, Elsevier, vol. 47(1), pages 1-12, January.
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