Putting OPEC Out of Business
I explain the recent peak and subsequent collapse in oil prices by strategic interaction between a limit-pricing oil cartel and an importer producing substitutes to oil, with productin costs falling with R&D investment. The model is consistent with reported narratives of the oil price collapse. Applied to climate policy and the development of clean substitutes, the model predicts equilibrium carbon taxes are below the Pigovian level, but put the monopolist out of business once oil loses its social value. Without taxes, the importer uses an expensive crash R&D programme instead. 'Green' R&D and carbon pricing are thus complements, not substitutes.
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