Inelastic Supply of Fossil Energy and Competing Environmental Policies

22 Pages Posted: 10 Jan 2017 Last revised: 17 Apr 2017

See all articles by Sungwan Hong

Sungwan Hong

Department of Economics, Pennsylvania State University

Seung-Gyu Sim

Aoyama Gakuin University

Date Written: February 25, 2017

Abstract

The inelastic supply of fossil energy in the international input market precipitates failure of Pigouvian taxation consequent to competition among governments, as imposition of an environmental tax increases (decreases) the marginal cost of domestic (foreign) firms. This paper demonstrates that unless the supply of fossil energy is perfectly elastic, cap-and-trade outperforms Pigouvian taxation in terms of the domestic welfare of adopting countries, and global welfare is maximized when all countries implement the alternative scheme. We further demonstrate that the linkage of permit markets, when the energy supply is sufficiently inelastic, improves global welfare.

Keywords: Fossil Energy Supply, Regulatory Competition, Cap-and-trade

JEL Classification: H23, L51, Q56, Q58

Suggested Citation

Hong, Sungwan and Sim, Seung-Gyu, Inelastic Supply of Fossil Energy and Competing Environmental Policies (February 25, 2017). Available at SSRN: https://ssrn.com/abstract=2896540 or http://dx.doi.org/10.2139/ssrn.2896540

Sungwan Hong

Department of Economics, Pennsylvania State University ( email )

University Park, PA 16802
United States

Seung-Gyu Sim (Contact Author)

Aoyama Gakuin University ( email )

4-4-25 Shibuya, Shibuya-ku
Tokyo, 150-8366
Japan

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