Demand- Versus Supply-Side Climate Policies with a Carbon Dioxide Ceiling

Thomas Eichner, Gilbert Kollenbach and Mark Schopf

The Economic Journal, 2023, vol. 133, issue 652, 1371-1406

Abstract: In a Hotelling model with a climate coalition and a free-riding fringe, we compare demand-side and supply-side climate policies aimed at keeping CO$_2$ concentration below a ceiling equivalent to global warming of $2^\circ{\rm C}$. With the demand-side policy, the coalition caps its fuel demand. The corresponding allocation is intra-temporally distorted. With the supply-side policy, the coalition purchases deposits. The corresponding allocation is inter-temporally distorted and the fuel extraction path can be discontinuous. In an empirically calibrated economy, a medium-sized (the grand) coalition is stable with the demand-side (supply-side) policy. If the coalition acts strategically, the stable grand coalition implements first best.

Date: 2023
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Working Paper: Demand versus Supply Side Climate Policies with a Carbon Dioxide Ceiling (2018)
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