Taxing Fossil Fuels Under Speculative Storage

Abstract

This paper investigates the mechanisms through which environmental taxes on fossil fuelusage can affect the main macroeconomic variables in the short-run. We concentrate on aparticular mechanism: speculative storage. The existence of forward-looking speculators inthe model improves the effectiveness of tax policies in reducing fossil fuel usage. Improvedpolicy effectiveness, however, is costly: it drives inflation and interest rates up, whileimpeding output. Based on this tradeoff, we seek an answer to the question how monetarypolicy should interact with environmental tax policies in our DSGE model of fossil fuelstorage.

Keywords: Fossil fuels, Environmental taxes, Tax policy, General equilibrium models, speculative storage, DSGE, energy, renewable energy, price, fuel storage, prices, oil, fuel supply, investment, fuel consumption, tax policies, fossil fuel consumption, energy consumption, fuel production, renewable energy production, oil production, alternative energy, energy source, spot price, fuel prices, investments, fossil fuel prices, crude oil, renewable energy consumption, alternative energy source, oil prices, energy input, fuel use, energy demand, emissions, energy usage, renewable resources, availability, energy sources, cost of energy, activities, tax rate, fuel market, source of energy, carbon emissions,

JEL Classification: E31, E52, H23, O44