Seminar

Flattening the carbon extraction path: Unilateral versus cooperative cost-effective action

Ruediger Pethig (University of Siegen)

May 9, 2011, 11:00–12:30

Toulouse

Room Amphi S

Environment Economics Seminar

Abstract

Internalizing the global negative externality of carbon emissions requires flattening the extraction path of world fossil energy resources (= world carbon emissions). Policy in-struments at the governments’ disposal are sign-unconstrained emission taxes. Our focus is on the simple and pragmatic policy approach of preventing world emissions from ex-ceeding 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 the choice of 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 compare the cooperative cost-effective ceiling policy with its unilateral 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 cli-mate 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 size of unilateral cost-effective taxes.

JEL codes

  • H22: Incidence
  • Q32: Exhaustible Resources and Economic Development
  • Q54: Climate • Natural Disasters • Global Warming