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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 Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

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, 2018. "The Grey Paradox: How fossil-fuel owners can benefit from carbon taxation," PSE-Ecole d'économie de Paris (Postprint) hal-01626780, HAL.
    • Handle: RePEc:hal:pseptp:hal-01626780
    DOI: 10.1016/j.jeem.2017.07.001
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    Cited by:

    1. Frederick van der Ploeg & Armon Rezai, 2020. "Stranded Assets in the Transition to a Carbon-Free Economy," Annual Review of Resource Economics, Annual Reviews, vol. 12(1), pages 281-298, October.
    2. Okullo, Samuel J. & Reynès, Frédéric & Hofkes, Marjan W., 2021. "(Bio-)Fuel mandating and the green paradox," Energy Economics, Elsevier, vol. 95(C).
    3. Akkaya Sahin & Bakkal Ufuk, 2020. "Carbon Leakage Along with the Green Paradox Against Carbon Abatement? A Review Based on Carbon Tax," Folia Oeconomica Stetinensia, Sciendo, vol. 20(1), pages 25-44, June.
    4. Sagasta Amagoia & Usategui José M., 2018. "Timing of Emissions and Effects of Emission Taxes in Durable-Goods Oligopolies," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 18(4), pages 1-21, October.
    5. Agarwala, Matthew & Burke, Matt & Klusak, Patrycja & Mohaddes, Kamiar & Volz, Ulrich & Zenghelis, Dimitri, 2021. "Climate Change And Fiscal Sustainability: Risks And Opportunities," National Institute Economic Review, National Institute of Economic and Social Research, vol. 258, pages 28-46, November.
    6. van der Ploeg, Frederick & Rezai, Armon, 2020. "The risk of policy tipping and stranded carbon assets," Journal of Environmental Economics and Management, Elsevier, vol. 100(C).
    7. Fanny Henriet & Katheline Schubert, 2019. "Is Shale Gas a Good Bridge to Renewables? An Application to Europe," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 72(3), pages 721-762, March.
    8. Thomas Eichner & Rüdiger Pethig, 2021. "Unilateral Phase-Out of Coal to Power in an Emissions Trading Scheme," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 80(2), pages 379-407, October.
    9. Renaud Coulomb & Fanny Henriet & Léo Reitzmann, 2025. "“Bad” Oil, “Worse” Oil, and Carbon Misallocation," Post-Print hal-05057328, HAL.
    10. Samson Mukanjari & Thomas Sterner, 2024. "Do markets Trump politics? Fossil and renewable market reactions to major political events," Economic Inquiry, Western Economic Association International, vol. 62(2), pages 805-836, April.
    11. Naef, Alain, 2024. "The impossible love of fossil fuel companies for carbon taxes," Ecological Economics, Elsevier, vol. 217(C).
    12. repec:hal:psewpa:halshs-03244647 is not listed on IDEAS
    13. Kim, Jung-Hun & Oh, Jeong-Ik & Tsang, Yiu Fai & Park, Young-Kwon & Lee, Jechan & Kwon, Eilhann E., 2020. "CO2-assisted catalytic pyrolysis of digestate with steel slag," Energy, Elsevier, vol. 191(C).
    14. Jorge Antunes & Abdollah Hadi-Vencheh & Ali Jamshidi & Yong Tan & Peter Wanke, 2024. "Efficiency of Low-Carbon Finance: Its Interrelationships with Industry and Macroeconomic Environment," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(3), pages 15328-15364, September.
    15. Hart, Rob & Gars, Johan, 2022. "The black paradox," European Economic Review, Elsevier, vol. 148(C).
    16. Renaud Coulomb & Oskar Lecuyer & Adrien Vogt-Schilb, 2019. "Optimal Transition from Coal to Gas and Renewable Power Under Capacity Constraints and Adjustment Costs," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(2), pages 557-590, June.
    17. Kollenbach, Gilbert & Schopf, Mark, 2022. "Unilaterally optimal climate policy and the green paradox," Journal of Environmental Economics and Management, Elsevier, vol. 113(C).
    18. William Nordhaus, 2022. "The Impact of Carbon Taxes on the Value of Fossil-Fuel Reserves and the Efficiency of Climate Policy," Cowles Foundation Discussion Papers 2344, Cowles Foundation for Research in Economics, Yale University.

    More about this item

    Keywords

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    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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