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Strategic Climate Policy with Offsets and Incomplete Abatement: Carbon Taxes

Joint Bank-Fund Brown-Bag Research Seminars on Environment and Energy:
Strategic Climate Policy with Offsets and Incomplete Abatement: Carbon Taxes
Versus Cap-and-Trade

Jon Strand
Development Resarch Group, Environment and Energy Team (DECEE), the World Bank

Wednesday, January 25, 2012
12.30-2 pm
Venue: MC6-598

Abstract:
This paper provides a first analysis of optimal offset policies by a “policy bloc” of fossil fuel importers which implements a coordinated climate policy, and faces a (non-policy) fringe of other fuel importers, and a bloc of exporters. We compare a carbon tax and a cap-and-trade scheme for the policy bloc, which in either case is accompanied by a fully 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 reduces the fuel export price, and by more when the policy bloc is large; and offsets are 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 it is larger the offset price can be higher under a cap. Fringe countries gain by mitigation in the policy bloc, more under a carbon tax mainly since the fuel import price is lower.

Bio, Jon Strand: 
Jon Strand, a Norwegian national, is senior economist in the Environment and Energy Team in the World Bank’s Development Research Group. His research focuses on environmental and climate policy, valuation of the environment and of statistical life, and on natural resource and energy issues. Over the period 2005-2008 he worked as the International Monetary Fund’s environmental economist. He has served as consultant on environmental policy matters to various international organizations including the OECD and the Inter-American Development Bank. He is currently on leave from a chair as professor of economics at the University of Oslo, from where he has his Ph D degree.
 
For further information on the presentation, contact Govinda Timilsina at: gtimilsina@worldbank.org.
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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