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Double limit pricing

Gerard van der Meijden (), Karolina Ryszka and Cees Withagen

Journal of Environmental Economics and Management, 2018, vol. 89, issue C, 153-167

Abstract: We study oil extraction by a monopolist who faces demand from a climate-aware and a climate-ignorant region. A renewable, perfect substitute for oil is available at constant unit cost. The climate-aware region uses a carbon tax and a renewables subsidy as policy instruments. Due to heterogeneity in climate policies between regions, the oil price path possibly contains two limit-pricing phases. We specify conditions under which a tightening of climate policies results in lower initial carbon emissions. A renewables subsidy and a carbon tax effectively force the monopolist to sell more oil to the climate-ignorant region, during the stage when demand from the climate-aware region has already vanished. We calibrate the model and numerically investigate climate damage and welfare effects of the policies of the climate-aware region. We find that both the carbon tax and a renewables subsidy lower climate damage, even though cumulative emissions are fixed.

Keywords: Limit pricing; Non-renewable resource; Monopoly; Climate policy (search for similar items in EconPapers)
JEL-codes: Q31 Q37 (search for similar items in EconPapers)
Date: 2018
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Journal of Environmental Economics and Management is currently edited by M.A. Cole, A. Lange, D.J. Phaneuf, D. Popp, M.J. Roberts, M.D. Smith, C. Timmins, Q. Weninger and A.J. Yates

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