Flattening the Carbon Extraction Path in Unilateral Cost-Effective Action

29 Pages Posted: 24 Aug 2011

See all articles by Thomas Eichner

Thomas Eichner

FernUniversität in Hagen

Rudiger Pethig

University of Siegen - School of Economic Disciplines; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 24, 2011

Abstract

Internalizing the global negative externality of carbon emissions requires flattening the extraction path of world fossil energy resources (= world carbon emissions). We consider governments having sign-unconstrained emission taxes at their disposal and seeking to prevent world emissions from exceeding 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 choosing 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 characterize the unilateral cost-effective ceiling policy and compare it with its fully cooperative 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 climate 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 magnitude of unilateral cost-effective taxes.

Keywords: unilateral climate policy, intertemporal climate policy, non-renewable energy resources, emission taxes

JEL Classification: H220, Q320, Q540

Suggested Citation

Eichner, Thomas and Pethig, Rudiger, Flattening the Carbon Extraction Path in Unilateral Cost-Effective Action (August 24, 2011). CESifo Working Paper Series No. 3546, Available at SSRN: https://ssrn.com/abstract=1915951 or http://dx.doi.org/10.2139/ssrn.1915951

Thomas Eichner

FernUniversität in Hagen ( email )

Universitätsstrasse 41
Feithstrathe 140
Hagen, 58084
Germany

Rudiger Pethig (Contact Author)

University of Siegen - School of Economic Disciplines ( email )

Hoelderlinstrasse 3
57068 Siegen
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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