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Inelastic Supply of Fossil Energy and Competing Environmental Regulatory Policies

Sungwan Hong () and Seung-Gyu Sim ()
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Sungwan Hong: Graduate School of Economics, University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113-0033, Japan
Seung-Gyu Sim: Graduate School of Economics, University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113-0033, Japan

Sustainability, 2018, vol. 10, issue 2, 1-17

Abstract: The inelastic supply of fossil energy in the international input market precipitates failure of Pigouvian taxation consequent to competition among governments, as imposition of an environmental tax increases (decreases) the marginal cost of domestic (foreign) firms. This paper demonstrates that unless the supply of fossil energy is perfectly elastic, cap-and-trade outperforms Pigouvian taxation in terms of the domestic welfare of adopting countries, and global welfare is maximized when all countries implement the alternative scheme. We further demonstrate that the linkage of permit markets, when the energy supply is sufficiently inelastic, improves global welfare.

Keywords: fossil energy supply; regulatory competition; cap-and-trade (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
Date: 2018
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