Double limit pricing

Research output: Contribution to JournalArticleAcademicpeer-review

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.

LanguageEnglish
Pages153-167
Number of pages15
JournalJournal of Environmental Economics and Management
Volume89
DOIs
StatePublished - May 2018

Fingerprint

climate
pollution tax
environmental policy
oil
damage
Climate
Limit pricing
carbon emission
cost
subsidy
Oil
Subsidies
Carbon tax
demand
Climate policy
Monopolist
Damage

Keywords

  • Climate policy
  • Limit pricing
  • Monopoly
  • Non-renewable resource

Cite this

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title = "Double limit pricing",
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.",
keywords = "Climate policy, Limit pricing, Monopoly, Non-renewable resource",
author = "{van der Meijden}, Gerard and Karolina Ryszka and Cees Withagen",
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}

Double limit pricing. / van der Meijden, Gerard; Ryszka, Karolina; Withagen, Cees.

In: Journal of Environmental Economics and Management, Vol. 89, 05.2018, p. 153-167.

Research output: Contribution to JournalArticleAcademicpeer-review

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