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Limit-Pricing and the (Un)Effectiveness of the Carbon Tax

  • Saraly Andrade de Sa

    ()

    (GREThA)

  • Julien Daubanes

    ()

    (ETH-Zürich)

This paper questions the ability of a carbon tax to reduce oil extraction. Demand for oil is very price inelastic. Facing such demand, an extractive cartel induces the highest price that does not destroy its demand: it tolerates ”non-drastic” substitutes but deters substitution possibilities that have the potential to drastically deteriorate its demand. Limit-pricing equilibria of non-renewable resource markets sharply differ from conventional Hotelling outcomes. Oil taxes become neutral. Policies only reduce current oil extraction when they support existing non-drastic substitutes. Since the carbon tax applies to oil and to its current carbon substitutes, it induces higher oil current production.

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File URL: http://faere.fr/pub/WorkingPapers/Andrade%20de%20S%C3%A1_Daubanes_FAERE_WP2014.07.pdf
File Function: First version, 2014
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Paper provided by FAERE - French Association of Environmental and Resource Economists in its series Working Papers with number 2014.07.

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Length: 40 pages
Date of creation: Jun 2014
Date of revision:
Handle: RePEc:fae:wpaper:2014.07
Contact details of provider: Web page: http://www.faere.fr

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