Taxes and Caps as Climate Policy Instruments with Domestic and Imported Fuels

This paper develops a global model of climate policy, focusing on the choice between tax and cap-and-trade solutions. The analysis assumes that the world can be split into two regions, with two fuels that both lead to carbon emissions. Region A consumes all fuels, and is responsible for defining and implementing climate policy. Region B produces all of fuel 1 (oil), while fuel 2 (interpreted as coal, natural gas, or renewables) is both produced and consumed in region A. The paper studies three model variants. All involve full policy coordination in each country block, but no coordination across blocks; and all involve an optimal producer tax on fuel 1 by region B. In model 1, region A sets two fuel consumption taxes, one for each fuel. The optimal region A tax on fuel 1 then exceeds the Pigou level as defined by the region; the tax set on fuel 2 is Pigouvian. The presence of a second fuel in region A reduces region B s optimal tax on fuel 1. In model 2, region A sets a common carbon tax, which is lower (higher) for fuel 1 (2) than in model 1. In model 3, region A sets a carbon emissions cap. This enhances region B s strategic position via the trade-off between fuels 1 and 2 in region A, following from the cap. In realistic cases, this leaves region A strategically weaker under a cap policy than under a tax policy, more so the less carbon-intensive the local fuel (2) is. In conclusion, a fuel-consuming and importing region that determines a climate policy will typically prefer to set a carbon tax, instead of setting a carbon emissions cap. The main reason is that a tax is more efficient than a cap at extracting rent from fuel (oil) exporters.

Bibliographic Details

Main Author:	Strand, Jon
Language:	English en_US
Published:	World Bank, Washington, DC 2010-01
Subjects:	ADVERSE EFFECTS, CAPS, CARBON, CARBON CAP, CARBON CONTENT, CARBON EMISSIONS, CARBON INTENSITY, CARBON LEAKAGE, CARBON PRICE, CARBON QUOTA, CARBON TAX, CARBON TAXES, CARBON TRADING, CLIMATE, CLIMATE CHANGE, CLIMATE DAMAGE, CLIMATE DAMAGES, CLIMATE EFFECTS, CLIMATE POLICY, COAL, DEMAND RESPONSE, DOMESTIC FUEL, DYNAMIC MODEL, ECONOMIC ANALYSIS, ELASTICITIES, EMISSION, EMISSIONS FROM FUEL, EMISSIONS INTENSITY, EMISSIONS QUOTAS, EMISSIONS REDUCTIONS, EMISSIONS TAXES, ENERGY CONSUMPTION, ENERGY SECURITY, ENVIRONMENTAL COSTS, ENVIRONMENTAL DAMAGE, ENVIRONMENTAL ECONOMICS, ENVIRONMENTAL EXTERNALITY, ENVIRONMENTAL TAX, ENVIRONMENTAL TAXES, EXCISE TAX, EXTERNALITIES, FOSSIL FUEL, FOSSIL FUEL PRODUCTION, FOSSIL FUELS, FREE TRADE, FUEL CONSUMPTION, FUEL PRICE, FUEL PRICES, FUEL PRODUCTION, FUEL SUBSTITUTION, FUEL TAX, FUEL TAXATION, FUEL TAXES, FUELS, GHG, GLOBAL CARBON EMISSIONS, GLOBAL EMISSIONS, GLOBAL ENERGY CONSUMPTION, GLOBAL WARMING, GREENHOUSE, GREENHOUSE GAS, GREENHOUSE GAS EMISSIONS, GREENHOUSE GASES, IMPORTS, LEVEL OF EMISSIONS, LOW-CARBON, NATURAL GAS, OIL, OIL COMPANIES, OIL IMPORTING, OIL SUPPLY, PH, POLICY MAKERS, PRICE OF EMISSIONS, PRICE OF FUEL, PUBLIC ECONOMICS, RENEWABLE ENERGY, RENEWABLE RESOURCE, RENEWABLE RESOURCES, TAX RATES, TAXATION OF FUEL, TOTAL EMISSIONS, TRADABLE EMISSIONS, TRANSPORT, TRUE, UTILITY FUNCTION, UTILITY FUNCTIONS,
Online Access:	http://documents.worldbank.org/curated/en/2010/01/11638138/taxes-caps-climate-policy-instruments-domestic-imported-fuels https://hdl.handle.net/10986/19949
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