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Bottom‐up world climate policies: Preserving fossil fuel deposits vs. capping fuel consumption

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  • Thomas Eichner
  • Rüdiger Pethig
Abstract
The policy of purchasing fossil fuel deposits for preservation is an alternative to the demand‐side climate policies that predominate in practice and in professional studies. This paper analyzes the deposit purchase approach and compares it to the standard demand‐side policy in a model with international trade and non‐cooperative governments that account for the effects of their policies on equilibrium prices. We investigate how the two regimes differ with respect to their equilibrium allocations and, in particular, with respect to the countries’ mitigation effort and welfare. If countries are symmetric, mitigation is stronger in the demand‐side than in the supply‐side regime and the transition from the latter to the former is welfare enhancing for all countries. If countries have different endowments of deposits in a two‐country economy, the country with higher extraction costs does not purchase deposits for preservation, and the country with lower extraction costs is better off with the supply‐side than with the demand‐side policy. Finally, we consider the case of combined policies and find surprisingly that no equilibrium in pure strategies exists, when heterogeneous countries apply both policy instruments. Politiques climatiques mondiales ascendantes : préservation des gisements de combustibles fossiles par opposition à la limitation de la consommation de carburant. La politique d’achat de gisements de combustibles fossiles aux fins de préservation représente une alternative aux politiques climatiques axées sur la demande prédominant à la fois dans la pratique mais aussi dans les études professionnelles. Cet article analyse l’approche fondée sur l’achat de gisements et la compare à la politique standard axée sur la demande dans un modèle de commerce international et de gouvernements non coopératifs prenant en compte les effets de leurs politiques sur les prix d’équilibre. Nous avons recherché en quoi les deux régimes différaient relativement à leur répartition de l’équilibre, et notamment relativement à l’effort d’atténuation et à la protection sociale. Si les pays sont symétriques, l’atténuation est plus prononcée dans un système axé sur la demande comparativement à un système axé sur l’offre, et la transition du second au premier système permet d’améliorer la protection sociale pour tous les pays. Dans une économie à deux pays différemment dotés en matière de gisements, le pays ayant les coûts d’extraction les plus élevés n’achète pas de gisements à des fins de préservation, tandis que le pays ayant les coûts d’extraction les moins élevés se retrouve en meilleure posture dans une politique axée sur l’offre plutôt que sur la demande. Pour terminer, nous examinons le cas des politiques combinées et, étonnamment, nous constatons qu’il n’existe aucun équilibre en matière de stratégies pures lorsque des pays hétérogènes appliquent les deux moyens d’action.

Suggested Citation

  • Thomas Eichner & Rüdiger Pethig, 2019. "Bottom‐up world climate policies: Preserving fossil fuel deposits vs. capping fuel consumption," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(3), pages 993-1035, August.
    • Handle: RePEc:wly:canjec:v:52:y:2019:i:3:p:993-1035
    DOI: 10.1111/caje.12398
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    1. Dulong, Angelika von & Hagen, Achim & Mendelevitch, Roman & Eisenack, Klaus, 2023. "Buy coal and gas? Interfuel carbon leakage on deposit markets with market power," Energy Economics, Elsevier, vol. 117(C).
    2. Vogt, Angelika & Hagen, Achim & Eisenack, Klaus, 2020. "Buy coal, cap gas! Markets for fossil fuel deposits when fuel emission intensities differ," Working Paper Series 304708, Humboldt University Berlin, Department of Agricultural Economics.

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    JEL classification:

    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices

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