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

Jon Strand

Journal of Environmental Economics and Management, 2013, vol. 66, issue 2, 202-218

Abstract: This paper provides a first analysis of a “policy bloc” of fossil fuel importers which implements an optimal climate policy, faces a (non-policy) fringe of other fuel importers, and an exporter bloc, and purchases offset from the fringe. We compare a carbon tax and a cap-and-trade scheme for the policy bloc, in either case accompanied by an efficient offset mechanism for reducing emissions in the fringe. The policy bloc is shown to prefer a tax over a cap, since only a tax reduces the fuel export price and by more when the policy bloc is larger. Offsets are also more favorable to the policy bloc under a tax than under a cap. The optimal offset price under a carbon tax is below the tax rate, while under a cap and free quota trading the offset price must equal the quota price. The domestic carbon and offset prices are both higher under a tax than under a cap when the policy bloc is small. When the policy bloc is larger, the offset price can be higher under a cap. Fringe countries gain by mitigation in the policy bloc, more under a carbon tax since the fuel import price is lower.

Keywords: Climate policy; Carbon taxes; Cap-and-trade schemes; Carbon emissions; Strategic trade policy (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (26)

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Working Paper: Strategic climate policy with offsets and incomplete abatement: carbon taxes versus cap-and-trade (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:66:y:2013:i:2:p:202-218

DOI: 10.1016/j.jeem.2013.03.002

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