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Strategic climate policy with offsets and incomplete abatement : carbon taxes versus cap-and-trade (Inglês)

This paper provides a first analysis of a 'policy bloc' of fossil fuel importers which implements an optimal coordinated climate policy, faces a (non-policy) fringe of other fuel importers, and a bloc of exporters, and purchases offset from the fringe. The author compares a carbon tax and a cap-and trade scheme for the policy bloc, which in either case is accompanied by an efficient offset mechanism for reducing emissions in the fringe. The policy bloc is then shown to prefer a tax over a cap, since only a tax leads to a lower fuel export price and by more when the policy bloc is larger. Offsets are also more favorable to the policy bloc under a tax than under a cap. The optimal offset price under a carbon tax is below the tax rate, while under a cap and free quota trading the offset price must equal the quota price. The domestic carbon and offset prices are both higher under a tax than under a cap when the policy bloc is small. When the policy bloc is larger, the offset price can be higher under a cap. Fringe countries gain by mitigation in the policy bloc, and more under a carbon tax since the fuel import price is lower.


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    Strategic climate policy with offsets and incomplete abatement : carbon taxes versus cap-and-trade

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