Springer Nature is making SARS-CoV-2 and COVID-19 research free. View research | View latest news | Sign up for updates

International CO2 taxation and the dynamics of fossil fuel markets

  • 91 Accesses

  • 15 Citations

Abstract

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.

This is a preview of subscription content, log in to check access.

References

  1. Barnett, A. (1980). “The Pigouvian Tax Rule Under Monopoly.”American Economic Review 70, 1073–1141.

  2. Basar, T., and A. Haurie. (1984). “Feedback Equilibria in Differential Games with Structural and Modal Uncertainties. In S. Cruz (ed.),Advances in Large Scale Systems (Vol. 1).

  3. Buchanan, J. (1969). “External diseconomies, Corrected Taxes, and Market Structure.”American Economic Review 59, 174–177.

  4. de Zeeuw, A.J. and F. van der Ploeg. (1991). “Difference Games and Policy Evaluation: A Conceptual Framework.”Oxford Economic Papers 43, 612–636.

  5. Farzin, H., and O. Tahvonen. (1995). “Global Carbon Cycle and Optimal Path of a Carbon Tax.” Manuscript, Georgetown University, Washington, DC.

  6. Groot, F., C. Withagen, and A. de Zeeuw. (1992). “Note on the Open-Loop von Stackelberg Equilibrium in the Cartel Versus Fridge Model.”Economic Jouirnal 102, 1478–1484.

  7. Hoel, M. (1992). “Emission Taxes in a Dynamic International Game of CO2 Emissions.” In Rüdiger Pethig (ed.),Conflicts and Cooperation in Managing Environmental Resources. Berlin: Springer-Verlag.

  8. Kahn, C. (1986). “The Durable Goods Monopolist and Consistency with Increasing Costs.”Econometrica 54, 275–294.

  9. Karp, L. (1984). “Optimality and Consistency in a Differential Game with Non-renewable Resources.”Journal of Economic Dynamics and Control 8, 73–98.

  10. Karp, L., and D. Newbery. (1993). “Intertemporal Consistency Issues in Depletable Resources.” InHandbook of Natural Resource and Energy Economics (vol. 3). A.V. Kneese and J.L. Sweeney, (eds.). Elsevier Science.

  11. Maier-Reimer, E., and K. Hasselmann. (1987). “Transport and Storage of CO2 in the Ocean: Inorganic Ocean Circulation Carbon Cycle Model.”Climate Dynamics 2, 63–90.

  12. Maskin, E., and D. Newbery. (1990). “Disadvantageous Oil Tariffs and Dynamic Consistency.”American Economic Review 80, 143–156.

  13. Oberle, H., H. von Storch, and O. Tahvonen. (1994). “Numerical Computation of Optimal Reduction of CO2-Emissions for a Simplified Climate-Economic Model.” Institut für Antgewandte Mathematic der Universität Hamburg, Reihe C.

  14. Porteba, J. (1991). “Tax Policy to Combat Global Warming: On Designing a Carbon Tax.” In R. Dornbusch and J. Poterba (eds.),Global Warming: Economic Policy Responses. Cambridge, MA.

  15. Seierstad, A., and K. Sydsæter. (1987).Optimal Control Theory with Economic Applicatoins. New York: North-Holland.

  16. Simaan, M., and J.B. Cruz. (1973). “Additional Aspects of the Stackelberg Strategy in Non-zero Sum Games.”Journal of Optimization Theory and Applications 11, 613–626.

  17. Tahvonen, O., H. von Storch, and J. von Storch. (1994). “Economic Efficiency of CO2-Reduction Programs.”Climate Research 4, 127–141.

  18. Tahvonen, O. (1995). “Carbon Dioxide Abatement as a Differential Game.”European Journal of Political Economy 10, 685–705.

  19. Tsutsui, S., and K. Mino. (1990). Nonlinear Strategies in Dynamic Competition with Sticky Prices.Journal of Economic Theory 52, 136–161.

  20. Wirl, F. (1994). “Pigouvian Taxation of Energy for Flow and Stock Externalities and Strategic Noncompetitive Energy Pricing.”Journal of Environmental Economics and Management 26, 1–18.

Download references

Author information

Rights and permissions

Reprints and Permissions

About this article

Cite this article

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

Download citation

Key words

  • energy
  • fossil fuels
  • CO2 tax