Prices versus quantities: The impact of fracking on the choice of climate policy instruments in the presence of OPEC

Daniel Nachtigall

No 2017/6, Discussion Papers from Free University Berlin, School of Business & Economics

Abstract: This paper analyzes the impact of declining extraction costs of shale oil producers on the choice of the policy instrument of a climate coalition in the presence of a monopolistic oil supplier such as OPEC. Shale oil producers' extraction costs represent an upper bound for the oil price OPEC can charge. Declining extraction costs ultimately limit OPEC's price setting behavior and thus impacts the optimal climate policy of the climate coalition. A pure cap-and-trade system is weakly welfare-inferior relative to a carbon tax for the climate coalition. While high extraction costs allow OPEC to appropriate the whole climate rent in case of quantity regulation, declining extraction costs imply OPEC to capture only a part of the climate rent. A carbon tax always generates positive revenue and thus is welfare-superior in general. However, low extraction costs prevent OPEC from exerting its market power, leading the climate coalition to implement the Pigouvian tax in the first place. Both market-based instruments are equivalent in this case. Complementing a quota with a base tax cannot outperform a pure carbon tax.

Keywords: fossil fuel taxation; prices versus quantities; international redistribution; global warming (search for similar items in EconPapers)
JEL-codes: H23 Q31 Q54 Q58 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:fubsbe:20176

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