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Market Power, International CO2 Taxation and Oil Wealth

Abstract:
We present an intertemporal equilibrium model for fossil fuels, and study the effects on oil prices, extraction paths and oil wealth of an international carbon tax on fossil fuel consumption Our conclusion is that a carbon tax will hurt OPEC more than other producers, as the cartel is induced by its market power to restrain production in order to maintain the oil price. Thus, the effects on the oil wealth of the competitive fringe are minor, while OPECs wealth is considerably reduced. We also show by applying a competitive model that this result is due to market structure, and not to differences in the resource base.

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Energy Specializations: Petroleum – Policy and Regulation; Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Environment – Policy and Regulation

JEL Codes:
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Q54 - Climate; Natural Disasters and Their Management; Global Warming

Keywords: International Carbon taxes, Exhaustible resources, Oil wealth

DOI: 10.5547/ISSN0195-6574-EJ-Vol18-No4-2


Published in Volume18, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.