Limit-Pricing and the (Un)Effectiveness of the Carbon Tax

Saraly Andrade de Sa () and Julien Daubanes ()
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Saraly Andrade de Sa: GREThA
Julien Daubanes: ETH-Zürich

No 2014.07, Working Papers from FAERE - French Association of Environmental and Resource Economists

Abstract: This paper questions the ability of a carbon tax to reduce oil extraction. Demand for oil is very price inelastic. Facing such demand, an extractive cartel induces the highest price that does not destroy its demand: it tolerates ”non-drastic” substitutes but deters substitution possibilities that have the potential to drastically deteriorate its demand. Limit-pricing equilibria of non-renewable resource markets sharply differ from conventional Hotelling outcomes. Oil taxes become neutral. Policies only reduce current oil extraction when they support existing non-drastic substitutes. Since the carbon tax applies to oil and to its current carbon substitutes, it induces higher oil current production.

Keywords: Carbon tax; Limit pricing; Non-renewable resource; Monopoly; Demand elasticity (search for similar items in EconPapers)
JEL-codes: H21 L12 Q30 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2014-06
New Economics Papers: this item is included in nep-ene and nep-env
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http://faere.fr/pub/WorkingPapers/Andrade%20de%20S ... _FAERE_WP2014.07.pdf First version, 2014 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:fae:wpaper:2014.07

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