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International CO2 taxation and the dynamics of fossil fuel markets

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International CO2 taxation may have major implications for fossil fuel markets. These effects must be taken into account in calculating the net gain from CO2 taxation. The paper assumes that buyers have formed an agency that applies a CO2 tax and sellers are competitive or constitute a resource cartel. When sellers are competitive, buyers' agency may use monopsony power by applying an import tariff. At the resulting time-consistent equilibrium, the sellers lose their resource rent. In contrast, the solution where the sellers' cartel maximizes its profits is time inconsistent. At the time-consistent Nash feedback equilibrium, the seller's monopoly power vanishes asymptotically. The sellers' export fee reduces the buyers' pollution tax. At this equilibrium, the buyers' pollution tax includes an import subsidy, and the tax falls below the present value of the marginal pollution damage. In the Nash feedback equilibrium, higher pollution damage may imply higher initial producer prices, although this effect is always the reverse in the Pareto optimum.

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Tahvonen, O. International CO2 taxation and the dynamics of fossil fuel markets. Int Tax Public Finan 2, 261–278 (1995). https://doi.org/10.1007/BF00877501

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Key words

  • energy
  • fossil fuels
  • CO2 tax