The Fossil Endgame: Strategic Oil Price Discrimination and Carbon Taxation

Jiegen Wie, Magnus Wennlock, Daniel J.A. Johansson and Thomas Sterner

RFF Working Paper Series from Resources for the Future

Abstract: This paper analyzes how fossil fuel-producing countries can counteract climate policy. We analyze the exhaustion of oil resources and the subsequent transition to a backstop technology as a strategic game between the consumers and producers of oil, which we refer to simply as “OECD” and “OPEC,” respectively. The consumers, OECD, derive benefits from oil, but worry about climate effects from carbon dioxide emissions. OECD has two instruments to manage this: it can tax fuel consumption and decide when to switch to a carbon-neutral backstop technology. The tax reduces climate damage and also appropriates some of the resource rent. OPEC retaliates by choosing a strategy of price discrimination, subsidizing oil in its domestic markets. The results show that price discrimination enables OPEC to avoid some of the adverse consequences of OECD’s fuel tax and its switch to the backstop technology by consuming a larger share of the oil in its own domestic markets. Our results suggest that persuading fossil exporters to stop subsidizing domestic consumption will be difficult.

Keywords: dynamic games; stock externalities; carbon tax; non-renewable resources; energy subsidies (search for similar items in EconPapers)
JEL-codes: D62 H23 Q34 Q54 (search for similar items in EconPapers)
Date: 2011-09-19
New Economics Papers: this item is included in nep-ene, nep-env and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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