Flattening the Carbon Extraction Path in Unilateral Cost-Effective Action

Thomas Eichner and Rüdiger Pethig

No 3546, CESifo Working Paper Series from CESifo

Abstract: Internalizing the global negative externality of carbon emissions requires flattening the extraction path of world fossil energy resources (= world carbon emissions). We consider governments having sign-unconstrained emission taxes at their disposal and seeking to prevent world emissions from exceeding some binding aggregate emission ceiling in the medium term. Such a ceiling policy can be carried out either in full cooperation of all (major) carbon emitting countries or by a sub-global climate coalition. Unilateral action has to cope with carbon leakage and high costs which makes a strong case for choosing a policy that implements the ceiling in a cost-effective way. In a two-country two-period general equilibrium model with a non-renewable fossil-energy resource we characterize the unilateral cost-effective ceiling policy and compare it with its fully cooperative counterpart. We show that with full cooperation there exists a cost-effective ceiling policy in which only first-period emissions are taxed at a rate that is uniform across countries. In contrast, the cost-effective ceiling policy of a sub-global climate coalition is characterized by emission regulation in both periods. That policy may consist either of positive tax rates in both periods or of negative tax rates (= subsidies) in both periods or of a positive rate in the first and a negative rate in the second period. The share of the total stock of energy resources owned by the sub-global climate coalition turns out to be a decisive determinant of the sign and magnitude of unilateral cost-effective taxes.

Keywords: unilateral climate policy; intertemporal climate policy; non-renewable energy resources; emission taxes (search for similar items in EconPapers)
JEL-codes: H22 Q32 Q54 (search for similar items in EconPapers)
Date: 2011
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Related works:
Journal Article: Flattening the carbon extraction path in unilateral cost-effective action (2013)
Working Paper: Flattening the carbon extraction path in unilateral cost-effective action (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_3546

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