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Buy coal? Deposit markets prevent carbon leakage

  • Bård Harstad

If a coalition of countries implements climate policies, nonparticipants tend to consume more, pollute more, and invest too little in renewable energy sources. In response, the coalition's equilibrium policy distorts trade and is not time-consistent. This paper derives conditions for when trading fossil fuel deposits increase efficiency. In isolation, a bilateral transaction may occur too often or too seldom compared to the optimum. However, when the market clears, the above-mentioned problems vanish, the first-best is implemented, and the coalition finds it optimal to rely entirely on supply-side policies, which are simple to implement in practice.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16119.

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Date of creation: Jun 2010
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Publication status: published as “Buy Coal! A Case for Supply-Side Environmental Policy,” Journal of Political Economy 120 (1): 77-115
Handle: RePEc:nbr:nberwo:16119
Note: EEE PE POL
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