Carbon Taxes, Oil Monopoly and Petrodollar Recycling
We analyze the effects of an announced future carbon tax increase on the extraction behavior of a monopolistic supplier of a scarce fossil energy resource like oil in a two country, two period general equilibrium model with symmetric and homothetic preferences and no extraction costs. Based on the monopolistâ€™s strategic consideration of the interplay between the resource and the capital market, and especially of the effects of the extraction decision on the return on petrodollar financed capital investments we identify and analyze a new channel for the reversal of the green paradox, a major concern regarding carbon taxation. We employ a numerical simulation and a sensitivity analysis with regard to the model parameters to evaluate the prevalence of such a reversal of the green paradox and find that it robustly arises under a wide range of reasonable parameter settings.
|Date of creation:||2015|
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