The fossil endgame: strategic oil price discrimination and carbon taxation
Journal article, 2012

This paper analyzes how fossil fuel-producing countries can counteract climate policy. We analyze the exhaustion of oil resources and the subsequent transition to a backstop technology as a strategic game between the consumers and producers of oil, which we refer to simply as ‘OECD’ and ‘OPEC’, respectively. The consumers, OECD, derive benefits from oil, but worry about climate effects from carbon dioxide emissions. OECD has two instruments to manage this: it can tax fuel consumption and decide when to switch to a carbon-neutral backstop technology. The tax reduces climate damage and also appropriates some of the resource rent. OPEC retaliates by choosing a strategy of price discrimination, subsidizing oil in its domestic markets. The results show that price discrimination enables OPEC to avoid some of the adverse consequences of OECD's fuel tax and its switch to the backstop technology by consuming a larger share of the oil in its own domestic markets. Our results suggest that persuading fossil exporters to stop subsidizing domestic consumption will be difficult.

Author

Jiegen Wei

University of Gothenburg

Magnus Hennlock

University of Gothenburg

Daniel Johansson

Chalmers, Energy and Environment, Physical Resource Theory

Thomas Sterner

University of Gothenburg

Journal of Environmental Economics and Policy

2160-6552 (ISSN)

Vol. 1 1 48-69

Driving Forces

Sustainable development

Areas of Advance

Energy

Subject Categories

Economics

More information

Created

10/6/2017