ON THE PATH OF AN OIL PIGOVIAN TAX*

Antoine Belgodere

Manchester School, 2009, vol. 77, issue 5, 632-649

Abstract: This paper studies optimal climate policy in the presence of oil rents. Several authors have found that, according to Hotelling's rule, in the long run, the optimal ad valorem tax must decrease. However, if the pollution is a stock and if environmental concerns impose stopping the resource extraction before its exhaustion, we show that an ad valorem tax defined over the rent cannot decentralize the optimum. In this case, an increasing per‐unit tax can decentralize the optimum. Such a tax implies the disappearance of the Hotelling rent. Thus, the extraction problem reduces to a pollution‐control problem.

Date: 2009
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