Monopoly, unilateral climate policies and limit pricing

Gerard van der Meijden; Cees Withagen

doi:10.1016/j.jedc.2020.103995

Monopoly, unilateral climate policies and limit pricing

Gerard van der Meijden^*, Cees Withagen

^*Corresponding author for this work

Research output: Contribution to Journal › Article › Academic › peer-review

Abstract

We examine the behavior of a fossil fuel monopolist who faces demand from two regions: a ‘climate club’ and the ‘rest of the world’ (ROW). Each region is able to produce a perfect substitute for fossil energy at constant marginal costs. The climate club uses a carbon tax and a renewables subsidy as policy instruments. The ROW is policy-inactive. We fully characterize the market equilibrium and show that, due to differences in climate policies between the climate club and the ROW, the monopolistic fossil fuel supplier may choose for two limit-pricing phases to postpone entry of renewables producers: First in the climate club and later in the ROW. As soon as energy demand from the climate club shifts from fossil fuels to renewables, the monopolist abruptly increases the fossil price for the ROW.

Original language	English
Article number	103995
Journal	Journal of Economic Dynamics and Control
Volume	120
DOIs	https://doi.org/10.1016/j.jedc.2020.103995
Publication status	Published - Nov 2020

Funding

The authors would like to thank Julien Daubanes, Niko Jaakkola, Rick van der Ploeg, Karolina Ryszka, 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), and the CESifo Area Conference on Energy and Climate Economics (Munich, 2016) for their valuable comments. The authors gratefully acknowledge financial support from FP7-IDEAS-ERC Grant No. 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.jedc.2020.103995

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title = "Monopoly, unilateral climate policies and limit pricing",

abstract = "We examine the behavior of a fossil fuel monopolist who faces demand from two regions: a {\textquoteleft}climate club{\textquoteright} and the {\textquoteleft}rest of the world{\textquoteright} (ROW). Each region is able to produce a perfect substitute for fossil energy at constant marginal costs. The climate club uses a carbon tax and a renewables subsidy as policy instruments. The ROW is policy-inactive. We fully characterize the market equilibrium and show that, due to differences in climate policies between the climate club and the ROW, the monopolistic fossil fuel supplier may choose for two limit-pricing phases to postpone entry of renewables producers: First in the climate club and later in the ROW. As soon as energy demand from the climate club shifts from fossil fuels to renewables, the monopolist abruptly increases the fossil price for the ROW.",

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AB - We examine the behavior of a fossil fuel monopolist who faces demand from two regions: a ‘climate club’ and the ‘rest of the world’ (ROW). Each region is able to produce a perfect substitute for fossil energy at constant marginal costs. The climate club uses a carbon tax and a renewables subsidy as policy instruments. The ROW is policy-inactive. We fully characterize the market equilibrium and show that, due to differences in climate policies between the climate club and the ROW, the monopolistic fossil fuel supplier may choose for two limit-pricing phases to postpone entry of renewables producers: First in the climate club and later in the ROW. As soon as energy demand from the climate club shifts from fossil fuels to renewables, the monopolist abruptly increases the fossil price for the ROW.

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Monopoly, unilateral climate policies and limit pricing

Abstract

Funding

Keywords

UN SDGs

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