Double limit pricing

Gerard van der Meijden; Karolina Ryszka; Cees Withagen

doi:10.1016/j.jeem.2018.03.010

Double limit pricing

Gerard van der Meijden^*, Karolina Ryszka, Cees Withagen

^*Corresponding author for this work

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Abstract

We study oil extraction by a monopolist who faces demand from a climate-aware and a climate-ignorant region. A renewable, perfect substitute for oil is available at constant unit cost. The climate-aware region uses a carbon tax and a renewables subsidy as policy instruments. Due to heterogeneity in climate policies between regions, the oil price path possibly contains two limit-pricing phases. We specify conditions under which a tightening of climate policies results in lower initial carbon emissions. A renewables subsidy and a carbon tax effectively force the monopolist to sell more oil to the climate-ignorant region, during the stage when demand from the climate-aware region has already vanished. We calibrate the model and numerically investigate climate damage and welfare effects of the policies of the climate-aware region. We find that both the carbon tax and a renewables subsidy lower climate damage, even though cumulative emissions are fixed.

Original language	English
Pages (from-to)	153-167
Number of pages	15
Journal	Journal of Environmental Economics and Management
Volume	89
Early online date	30 Mar 2018
DOIs	https://doi.org/10.1016/j.jeem.2018.03.010
Publication status	Published - May 2018

Funding

The authors would like to thank Julien Daubanes, Niko Jaakkola, Rick van der Ploeg, Ingmar Schumacher, Hubert Stahn, two anonymous referees, and participants at the Tinbergen conference (Amsterdam, 2016), the EAERE conference (Zurich, 2016), the SURED conference (Banyuls-sur-Mer, 2016), the FAERE conference (Bordeaux, 2016), the Environmental and Natural Resources Conservation workshop (Montpellier, 2016), the CESifo Area Conference on Energy and Climate Economics (Munich, 2016), the Conference in honour of John Hartwick (October 2017, Kingston, Ontario), and the Workshop in memory of Pierre Lasserre (October 2017, Montréal, Québec) for their valuable comments. The authors gratefully acknowledge financial support from FP7-IDEAS-ERC Grant No. 269788 (GP).

Funders	Funder number
Seventh Framework Programme	269788
FP7 Ideas: European Research Council	269788 (GP)

Keywords

Climate policy
Limit pricing
Monopoly
Non-renewable resource

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.1016/j.jeem.2018.03.010

Meijden2018_Double limit pricingFinal published version, 1.22 MBLicence: Article 25fa Dutch Copyright Act

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abstract = "We study oil extraction by a monopolist who faces demand from a climate-aware and a climate-ignorant region. A renewable, perfect substitute for oil is available at constant unit cost. The climate-aware region uses a carbon tax and a renewables subsidy as policy instruments. Due to heterogeneity in climate policies between regions, the oil price path possibly contains two limit-pricing phases. We specify conditions under which a tightening of climate policies results in lower initial carbon emissions. A renewables subsidy and a carbon tax effectively force the monopolist to sell more oil to the climate-ignorant region, during the stage when demand from the climate-aware region has already vanished. We calibrate the model and numerically investigate climate damage and welfare effects of the policies of the climate-aware region. We find that both the carbon tax and a renewables subsidy lower climate damage, even though cumulative emissions are fixed.",

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AB - We study oil extraction by a monopolist who faces demand from a climate-aware and a climate-ignorant region. A renewable, perfect substitute for oil is available at constant unit cost. The climate-aware region uses a carbon tax and a renewables subsidy as policy instruments. Due to heterogeneity in climate policies between regions, the oil price path possibly contains two limit-pricing phases. We specify conditions under which a tightening of climate policies results in lower initial carbon emissions. A renewables subsidy and a carbon tax effectively force the monopolist to sell more oil to the climate-ignorant region, during the stage when demand from the climate-aware region has already vanished. We calibrate the model and numerically investigate climate damage and welfare effects of the policies of the climate-aware region. We find that both the carbon tax and a renewables subsidy lower climate damage, even though cumulative emissions are fixed.

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Double limit pricing

Abstract

Funding

Keywords

UN SDGs

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