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Climate Policy with Dynamic Fossil Fuel Markets: Prices versus Quantities

Climate Policy with Dynamic Fossil Fuel Markets: Prices versus Quantities

By Larry Karp, Sauleh Siddiqui, and Jon Strand

 Presented by

Larry Karp

Department of Agricultural and Resource Economics
University of California, Berkeley
Venue: MC6-598
Wednesday, June 29, 12.30-2 pm

We study numerical solutions to a dynamic game between a large importer and a large exporter of fossil fuels, facing a non-coordinated, third group of countries (a "fringe"), interpreted as a set of developing countries which have no climate policy and are net fossil fuel importers. The importer and exporter can each choose either a tax or quota policy, giving rise to four possible policy combinations. Both want to manipulate the terms of trade in their favor, and the importer also has concern for the stock of greenhouse gases. We compare equilibrium price, stock and payoff trajectories under the four combinations of policies. If the importer and exporter can commit at time 0, the unique Nash equilibrium is for the exporter to choose a tax and the importer to choose a quota. Non-competitive behavior creates large welfare losses for the fringe. The choice of policy instrument has a smaller,  but still substantial, effect on the fringe's welfare.

Larry Karp is professor of economics in the Department of Agricultural and Resource Economics, University of California, Berkeley. He is an internationally leading researcher in the areas of natural resource and environmental economics, and has published widely in leading journals on a wide range of topics including principles of extraction of natural resources, and climate policy. He is considered an international pioneer in the application of (two-sided) differential games to the analysis of natural resource extraction and price determination, and in the analysis of implications of uncertainty for climate policy.

For further information on the presentation, contact Jon Strand at:, 202-458-5122

The Joint Bank-Fund Brown-Bag Research Seminars on Environment and Energy is a joint initiative between the Development Research Group, Environment and Energy Team (DECEE), World Bank, and the Fiscal Affairs Department, IMF. Organizers of the series are Jon Strand (DECEE), and Ruud de Mooij and Ian Parry (FAD/IMF). The seminars are held at lunch time, normally once every two weeks, alternately in the Bank and Fund. Aims of the seminars are to raise attention to, and interest in, environment, energy and natural resources issues in both institutions; to promote the interaction between the two institutions in these fields; and to improve the institutions' common work on policy.

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