Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2015-12-18
Revision-Date: 2017-01-30
Number: 15-136/VIII
Author-Name: Gerard van der Meijden
Author-Workplace-Name: VU University Amsterdam, the Netherlands
Author-Name: Karolina Ryszka
Author-Workplace-Name: VU University Amsterdam, the Netherlands
Author-Name: Cees Withagen
Author-Workplace-Name: VU University Amsterdam, the Netherlands
Title: Double Limit Pricing
Abstract: We study fossil fuel extraction by a monopolist who faces demand from a climateaware and a climate-ignorant region. A renewable, perfect substitute for fossil energy is available at constant unit cost. The climate-aware region uses a carbon tax and a renewables subsidy as policy instruments. Due to heterogeneity in climate policies between regions, the fossil fuel price path possibly contains two limitpricing phases. Moreover, the shape of the price path depends on the presence of arbitrators on the market. With arbitrators, the fossil price is continuous. Without arbitrators, the price jumps upward when demand from the climate-aware region drops to zero. A tightening of climate policies results in lower initial resource use. The effect on medium-run extraction and on the duration of the fossil era depends on the presence of arbitrators on the market. We numerically investigate
the welfare effects of the policies of the climate-aware region. We find that the carbon tax lowers climate damage. The renewables subsidy, however, only lowers climate damage if there are arbitrators on the market.
Classification-JEL: Q31, Q37
Keywords: limit pricing, non-renewable resource, monopoly, carbon tax
File-Url: https://papers.tinbergen.nl/15136.pdf
File-Format: application/pdf
File-Size: 1589528 bytes
Handle: RePEc:tin:wpaper:20150136