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Strategic climate policy with offsets and incomplete abatement : carbon taxes versus cap-and-trade

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  • Strand, Jon

Abstract

This paper provides a first analysis of optimal offset policies by a"policy bloc"of fossil fuel importers implementing a climate policy, facing a (non-policy) fringe of other importers, and a bloc of fuel exporters. The policy bloc uses either a carbon tax or a cap-and-trade scheme, jointly with a fully efficient offset mechanism for reducing emissions in the fringe. The policy bloc is then shown to prefer a tax over a cap-and-trade scheme, since 1) a tax extracts more rent as fuel exporters reduce the export price, and more so when the policy bloc is larger relative to the fringe; and 2) offsets are more favorable to the policy bloc under a tax than under a cap-and-trade scheme. The optimal offset price under a carbon tax is half the tax rate; under a cap-and-trade scheme the quota and offset price are equal. The domestic carbon and offset price are both higher under a tax than under a cap-and-trade scheme when the policy bloc is small; when it is larger the offset price can be higher under a cap-and-trade scheme. Fringe countries gain by mitigation in the policy bloc, and more under a carbon tax since the fuel import price is lower, and since the price obtained when selling offsets is often higher (always so for a large fringe).

Suggested Citation

  • Strand, Jon, 2011. "Strategic climate policy with offsets and incomplete abatement : carbon taxes versus cap-and-trade," Policy Research Working Paper Series 5675, The World Bank.
  • Handle: RePEc:wbk:wbrwps:5675
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    References listed on IDEAS

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    Cited by:

    1. Zhang, Kun & Wang, Qian & Liang, Qiao-Mei & Chen, Hao, 2016. "A bibliometric analysis of research on carbon tax from 1989 to 2014," Renewable and Sustainable Energy Reviews, Elsevier, vol. 58(C), pages 297-310.
    2. Knut Rosendahl & Jon Strand, 2015. "Emissions Trading with Offset Markets and Free Quota Allocations," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 61(2), pages 243-271, June.
    3. Larry Karp & Sauleh Siddiqui & Jon Strand, 2016. "Dynamic Climate Policy with Both Strategic and Non-strategic Agents: Taxes Versus Quantities," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 65(1), pages 135-158, September.
    4. repec:eee:eecrev:v:99:y:2017:i:c:p:191-215 is not listed on IDEAS
    5. Nachtigall, Daniel, 2017. "Prices versus quantities: The impact of fracking on the choice of climate policy instruments in the presence of OPEC," Discussion Papers 2017/6, Free University Berlin, School of Business & Economics.
    6. Karolina Ryszka & Cees Withagen, 2016. "Unilateral Climate Policies: Incentives and Effects," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 63(2), pages 471-504, February.
    7. Strand, Jon, 2016. "Mitigation incentives with climate finance and treaty options," Energy Economics, Elsevier, vol. 57(C), pages 166-174.
    8. Gerard van der Meijden & Karolina Ryszka & Cees Withagen, 2015. "Double Limit Pricing," Tinbergen Institute Discussion Papers 15-136/VIII, Tinbergen Institute, revised 30 Jan 2017.
    9. Christoph Bohringer, Knut Einar Rosendahl, and Jan Schneider, 2014. "Unilateral Climate Policy: Can OPEC Resolve the Leakage Problem?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    10. Strand,Jon & Siddiqui,Sauleh, 2015. "Value of improved information about forest protection values, with application to rainforest valuation," Policy Research Working Paper Series 7423, The World Bank.
    11. Daniel Nachtigall, 2017. "Prices versus Quantities: The Impact of Fracking on the Choice of Climate Policy Instruments in the Presence of OPEC," Working Papers 2017001, Berlin Doctoral Program in Economics and Management Science (BDPEMS).
    12. Lawrence H. Goulder & Andrew Schein, 2013. "Carbon Taxes vs. Cap and Trade: A Critical Review," NBER Working Papers 19338, National Bureau of Economic Research, Inc.

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    Keywords

    Climate Change Economics; Climate Change Mitigation and Green House Gases; Energy Production and Transportation; Markets and Market Access; Environment and Energy Efficiency;

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