Dynamic Climate Policy with Both Strategic and Non-Strategic Agents: Taxes Versus Quantities

34 Pages Posted: 20 Apr 2016

See all articles by Larry S. Karp

Larry S. Karp

University of California, Berkeley

Sauleh Siddiqui

Johns Hopkins University

Jon Strand

World Bank

Date Written: October 1, 2013

Abstract

This paper studies a dynamic game where each of two large blocs, of fossil fuel importers and exporters respectively, sets either taxes or quotas to exercise power in fossil-fuel markets. The main novel feature is the inclusion of a "fringe" of non- strategic (emerging and developing) countries which both consume and produce fossil fuels. Cumulated emissions over time from global fossil fuel consumption create climate damages which are considered by both the strategic importer and the non-strategic countries. Markov perfect equilibria are examined under the four combinations of trade policies and compared with the corresponding static games where climate damages are given (not stock-related). The main results are that taxes always dominate quota policies for both the strategic importer and exporter and that "fringe" countries bene?t from a tax policy as compared with a quota policy for the strategic importer, as the import fuel price then is lower, and the strategic importer's fuel consumption is also lower, thus causing fewer climate damages.

Keywords: Economic Theory & Research, Climate Change Economics, Markets and Market Access, Debt Markets, Emerging Markets

Suggested Citation

Karp, Larry S. and Siddiqui, Sauleh and Strand, Jon, Dynamic Climate Policy with Both Strategic and Non-Strategic Agents: Taxes Versus Quantities (October 1, 2013). World Bank Policy Research Working Paper No. 6679. Available at SSRN: https://ssrn.com/abstract=2346542

Larry S. Karp (Contact Author)

University of California, Berkeley ( email )

Dept. of Agriculture & Resource Economics
313 Giannini Hall
Berkeley, CA 94720
United States
510-643-8911 (Fax)

Sauleh Siddiqui

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

Jon Strand

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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