OxCARRE Seminar: The Grey Paradox: How fossil-fuels owners can benefit from carbon taxation

Today's OxCARRE's seminar has Renaud Coulomb from LSE (website) speaking on

The Grey Paradox: How fossil-fuels owners can benefit from carbon taxation

Abstract

This paper studies the distributional impacts of optimal carbon taxation on fossil-fuels owners. We show that optimal carbon taxation can increase the profits of owners of a carbonemitting exhaustible resource. Such phenomenon contrasts with claims from fossil-fuels owners –especially from OPEC member countries– that carbon taxation will undermine their profits. We build a theoretical model of resource extraction where a polluting exhaustible resource competes with a dirtier abundant resource and a clean backstop. The atmospheric CO2 concentration has to be kept under a carbon ceiling and the optimal extraction path is decentralized by a carbon tax. As the carbon ceiling is tightened, the exhaustible-resource rent, and thus profits, is partly captured by the tax levier (the “capture effect”), but the dirtier resource is made less competitive (the “competition effect”). We determine conditions under which profits increase as the ceiling falls. The role of resource endowments, pollution contents, extraction costs and demand elasticity is analyzed. Calibrating the model for the transportation sector, we find that limiting cumulative new emissions in this sector between 322.7 and 637.5 GtCO2 increases profits of conventional-oil owners.

Working paper available here