Strategic Climate Policy with Offsets and Incomplete Abatement : Carbon Taxes Versus Cap-and-Trade
This paper provides a first analysis of optimal offset policies by a "policy bloc" of fossil fuel importers implementing a climate policy, facing a (non-policy) fringe of other importers, and a bloc of fuel exporters. The policy bloc uses...
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110602165151 http://hdl.handle.net/10986/3438 |
| Summary: | This paper provides a first analysis of
optimal offset policies by a "policy bloc" of
fossil fuel importers implementing a climate policy, facing
a (non-policy) fringe of other importers, and a bloc of fuel
exporters. The policy bloc uses either a carbon tax or a
cap-and-trade scheme, jointly with a fully efficient offset
mechanism for reducing emissions in the fringe. The policy
bloc is then shown to prefer a tax over a cap-and-trade
scheme, since 1) a tax extracts more rent as fuel exporters
reduce the export price, and more so when the policy bloc is
larger relative to the fringe; and 2) offsets are more
favorable to the policy bloc under a tax than under a
cap-and-trade scheme. The optimal offset price under a
carbon tax is half the tax rate; under a cap-and-trade
scheme the quota and offset price are equal. The domestic
carbon and offset price are both higher under a tax than
under a cap-and-trade scheme when the policy bloc is small;
when it is larger the offset price can be higher under a
cap-and-trade scheme. Fringe countries gain by mitigation in
the policy bloc, and more under a carbon tax since the fuel
import price is lower, and since the price obtained when
selling offsets is often higher (always so for a large fringe). |
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