Battle for Climate and Scarcity Rents: Beyond the linear-quadratic case

Frederick (Rick) van der Ploeg, Mark Kaga and Cees Withagen

No 155, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: Industria imports oil, produces final goods and wishes to mitigate global warming. Oilrabia exports oil and buys final goods from the other country. Industria uses the carbon tax to impose an import tariff on oil and steal some of Oilrabia’s scarcity rent. Conversely, Oilrabia has monopoly power and sets the oil price to steal some of Industria’s climate rent. We analyze the relative speeds of oil extraction and carbon accumulation under these strategic interactions for various production function specifications and compare these with the efficient and competitive outcomes. We prove that for the class of HARA production functions the oil price is initially higher and subsequently lower in the open-loop Nash equilibrium than in the efficient outcome. The oil extraction rate is thus initially too low and in later stages too high. The HARA class includes linear, loglinear and semi-loglinear demand functions as special cases. For non-HARA production functions Oilrabia may in the open-loop Nash equilibrium initially price oil lower than the efficient level, thus resulting in more oil extraction and climate damages. We also contrast the open-loop Nash and efficient outcomes numerically with the feedback Nash outcomes. We find that the optimal carbon tax path in the feedback Nash equilibrium is flatter than in the open-loop Nash equilibrium. It turns out that for certain demand functions using the carbon tax as an import tariff may hurt consumers’ welfare as the resulting user cost of oil is so high that the fall in welfare wipes out the gain from higher tariff revenues.

Keywords: exhaustible resources; Hotelling rule; efficiency; carbon tax; climate rent; differential game; open-loop Nash equilibrium; subgame-perfect Nash equilibrium; HARA production functions (search for similar items in EconPapers)
JEL-codes: C73 H30 Q32 Q37 Q54 (search for similar items in EconPapers)
Date: 2015-03-27
New Economics Papers: this item is included in nep-ene, nep-env and nep-gth
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Citations: View citations in EconPapers (26)

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Related works:
Journal Article: Battle for Climate and Scarcity Rents: Beyond the Linear-Quadratic Case (2015)
Working Paper: Battle for Climate and Scarcity Rents: Beyond the Linear-Quadratic Case (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:oxf:oxcrwp:155

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