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The Fossil Endgame: Strategic Oil Price Discrimination and Carbon Taxation

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  • Wie, Jiegen
  • Wennlock, Magnus
  • Johansson, Daniel J.A.
  • Sterner, Thomas

Abstract

This paper analyzes how fossil fuel-producing countries can counteract climate policy. We analyze the exhaustion of oil resources and the subsequent transition to a backstop technology as a strategic game between the consumers and producers of oil, which we refer to simply as “OECD” and “OPEC,” respectively. The consumers, OECD, derive benefits from oil, but worry about climate effects from carbon dioxide emissions. OECD has two instruments to manage this: it can tax fuel consumption and decide when to switch to a carbon-neutral backstop technology. The tax reduces climate damage and also appropriates some of the resource rent. OPEC retaliates by choosing a strategy of price discrimination, subsidizing oil in its domestic markets. The results show that price discrimination enables OPEC to avoid some of the adverse consequences of OECD’s fuel tax and its switch to the backstop technology by consuming a larger share of the oil in its own domestic markets. Our results suggest that persuading fossil exporters to stop subsidizing domestic consumption will be difficult.

Suggested Citation

  • Wie, Jiegen & Wennlock, Magnus & Johansson, Daniel J.A. & Sterner, Thomas, 2011. "The Fossil Endgame: Strategic Oil Price Discrimination and Carbon Taxation," RFF Working Paper Series dp-11-26, Resources for the Future.
  • Handle: RePEc:rff:dpaper:dp-11-26
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    References listed on IDEAS

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    More about this item

    Keywords

    dynamic games; stock externalities; carbon tax; non-renewable resources; energy subsidies;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q34 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Natural Resources and Domestic and International Conflicts
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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