Carbon Taxes in a Trading World

Seiichi Katayama, Ngo Long and Hiroshi Ohta

No 26, GSICS Working Paper Series from Graduate School of International Cooperation Studies, Kobe University

Abstract: We study a dynamic game involving a fossil-fuel exporting cartel and a coalition of importing countries that imposes carbon taxes. We show that there exists a unique Nash equilibrium, where all countries use feedback strategies. We also obtain two Stackelberg equilibria, one where the exporting cartel is the leader, and one where the coalition of importing countries is the leader. Not surprisingly, the world welfare under the Nash equilibrium is lower than that under the social planning, even though both solutions have the same steady state. Comparison of the Stackelberg equilibria with the Nash equilibrium is performed numerically. All our numerical examples reveal that world welfare under the Nash equilibrium is higher than that under the Stackelberg game where the exporting cartel is the leader. The worst outcome for world welfare occurs when the importing coalition is the Stackelberg leader.

Keywords: Exhaustible Resource; Carbon Tax; Nash and Stackerberg Equilibria (search for similar items in EconPapers)
JEL-codes: C73 Q34 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2013-06
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Persistent link: https://EconPapers.repec.org/RePEc:kcs:wpaper:26

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