Supply-side environmental policy - Part B Brd Harstad UiO March - PowerPoint PPT Presentation

Supply-side environmental policy - Part B Bård Harstad UiO March 22, 2019 Harstad (UiO) Supply-side environmental policy - Part B March 22, 2019 1 / 10

Literature - Carbon leakage Many countries are unlikely to participate in a climate coalition Dixit and Olson ’00, Barrett ’05, Bernauer ’11, Dutta&Radner ’11, Karp ’11, Kolstad ’11, Urpelainen ’11 Creates fear of carbon leakage (Markusen ’75, Hoel ’94...) If coalition reduces consumption, price declines, nonparticipants consume more If coalition reduces supply, price increases, nonparticipants produce more Costly Crowding out in addition to free-riding Coalition sets policies/tariffs which distort trade Green paradox and time-inconsistent policy (Sinn ’08) ... Harstad (UiO) Supply-side environmental policy - Part B March 22, 2019 2 / 10

Basic Model (Hoel ’94) Two set of players, M and N U i = B i ( y i ) − C i ( x i ) − p ( y i − x i ) if i ∈ N U i = B i ( y i ) − C i ( x i ) − p ( y i − x i ) − H ( ∑ M ∪ N y i ) if i = M ∑ M ∪ N y i = ∑ M ∪ N x i At the first best, � � B � i ( y ∗ B � y ∗ i ) = ∀ i , j ∈ M ∪ N j j � � C � i ( x ∗ C � x ∗ i ) = ∀ i , j ∈ M ∪ N j j i ) + H � � ∑ x ∗ � ∀ i ∈ M ∪ N B � i ( y ∗ C � i ( x ∗ i ) = i Harstad (UiO) Supply-side environmental policy - Part B March 22, 2019 3 / 10

The Market for Fuel Harstad (UiO) Supply-side environmental policy - Part B March 22, 2019 4 / 10

The Market for Fuel For every i ∈ N , � B � � � y i = D i ( p ) ≡ B �− 1 � i ( y i ) = p ( p ) i ⇒ x i = S i ( p ) ≡ C �− 1 C � i ( x i ) = p ( p ) i i ∈ N produces and/or consumes too much Harstad (UiO) Supply-side environmental policy - Part B March 22, 2019 5 / 10

The Equilibrium Policy Harstad (UiO) Supply-side environmental policy - Part B March 22, 2019 6 / 10

The Equilibrium Policy At stage one, M maximizes � � x M + ∑ = B M ( y M ) − C M ( x M ) − H − p ( y M − x M ) U M x i N s.t. D i ( p ) ∀ i ∈ N , D ( p ) ≡ ∑ y i = D i ( p ) N S i ( p ) ∀ i ∈ N , S ( p ) ≡ ∑ x i = S i ( p ) N ∑ ∑ y i = x i . M ∪ N M ∪ N Carbon leakage: If y M ↓ , then p ↓ and y i ↑ 1 If x M ↓ , then p ↑ and x i ↑ 2 Harstad (UiO) Supply-side environmental policy - Part B March 22, 2019 7 / 10

The Equilibrium Policy Proposition M’s equilibrium policy implements: � � S � ( p ) y M − x M H � + B � M ( y M ) − p = S � ( p ) − D � ( p ) , S � ( p ) − D � ( p ) � � S � ( p ) y M − x M H � − p − C � M ( x M ) = 1 − S � ( p ) − D � ( p ) . S � ( p ) − D � ( p ) Implemented by a tax on consumption and production (Hoel, 1994): � � S � ( p ) y M − x M H � · = + τ y S � ( p ) − D � ( p ) S � ( p ) − D � ( p ) � � S � ( p ) y M − x M H � · = 1 − − τ x S � ( p ) − D � ( p ) S � ( p ) − D � ( p ) Harstad (UiO) Supply-side environmental policy - Part B March 22, 2019 8 / 10

The Equilibrium Policy Proposition M’s equilibrium policy implements: � � S � ( p ) y M − x M H � + B � M ( y M ) − p = S � ( p ) − D � ( p ) S � ( p ) − D � ( p ) � � S � ( p ) y M − x M H � − p − C � M ( x M ) = 1 − S � ( p ) − D � ( p ) . S � ( p ) − D � ( p ) or a tax on production and a tariff (Markusen, 1975; Hoel, 1996): � � S � ( p ) y M − x M H � = + τ x S � ( p ) − D � ( p ) S � ( p ) − D � ( p ) � � S � ( p ) y M − x M H � · = + S � ( p ) − D � ( p ) . τ I S � ( p ) − D � ( p ) Harstad (UiO) Supply-side environmental policy - Part B March 22, 2019 9 / 10

A Basic Model (Golombek, Hagem and Hoel ’95) Fossil-fuel deposits can have different emission content. So, if country i ∈ N supplies x i units, let its total emission be E i ( x i ) , where E � i ( x i ) is the marginal emission content of a deposit located at x i . Proposition M’s equilibrium policy is given by: � � M ( x M ) − ∑ N E � i ( x i ) S � i ( p ) y M − x M H � − E � = (1) τ x S � ( p ) − D � ( p ) S � ( p ) − D � ( p ) ∑ N E � i ( x i ) S � i ( p ) y M − x M S � ( p ) − D � ( p ) H � + = (2) τ y S � ( p ) − D � ( p ) Harstad (UiO) Supply-side environmental policy - Part B March 22, 2019 10 / 10