September 25, 2011

The Fossil Endgame: Strategic Oil Price Discrimination and Carbon Taxation

by Jiegen Wie, Magnus Wenlock, Daniel J.A. Johansson and Thomas Sterner

- 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.

Wie, J., M. Wenlock, D.J.A. Johansson and T. Sterner (2011). "The Fossil Endgame: Strategic Oil Price Discrimination and Carbon Taxation." RFF Discussion Paper 11-26, Sept 2011.