Double limit pricing

Gerard van der Meijden*, Karolina Ryszka, Cees Withagen

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

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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 languageEnglish
Pages (from-to)153-167
Number of pages15
JournalJournal of Environmental Economics and Management
Volume89
Early online date30 Mar 2018
DOIs
Publication statusPublished - May 2018

Keywords

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

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