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

Author

Listed:
  • Renaud Coulomb

    (University of Melbourne)

  • Fanny Henriet

    (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)

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 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 CO2 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

  • Renaud Coulomb & Fanny Henriet, 2017. "The Grey Paradox: How fossil-fuel owners can benefit from carbon taxation," Post-Print hal-01626780, HAL.
  • Handle: RePEc:hal:journl:hal-01626780
    DOI: 10.1016/j.jeem.2017.07.001
    Note: View the original document on HAL open archive server: https://hal-pjse.archives-ouvertes.fr/hal-01626780
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    References listed on IDEAS

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    More about this item

    Keywords

    OPEC; Carbon taxation; Externality; Global warming; Non-renewable resources;

    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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