Working Paper: NBER ID: w16119
Authors: Brd Harstad
Abstract: If a coalition of countries implements climate policies, nonparticipants tend to consume more, pollute more, and invest too little in renewable energy sources. In response, the coalition's equilibrium policy distorts trade and is not time-consistent. This paper derives conditions for when trading fossil fuel deposits increase efficiency. In isolation, a bilateral transaction may occur too often or too seldom compared to the optimum. However, when the market clears, the above-mentioned problems vanish, the first-best is implemented, and the coalition finds it optimal to rely entirely on supply-side policies, which are simple to implement in practice.
Keywords: coal markets; carbon leakage; climate policy
JEL Codes: F55; H23; Q54; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Coalition climate policies (Q58) | Increased consumption and pollution by nonparticipants (D62) |
| Coalition climate policies (Q58) | Insufficient investment in renewable energy sources (Q42) |
| Absence of participation in climate policies (F64) | Negative environmental outcomes (Q53) |
| Trading fossil fuel deposits (L71) | Enhanced efficiency (H21) |
| Market clearing (D41) | Dissipation of trade distortion and policy inconsistency (F13) |
| Market clearing (D41) | Implementation of first-best solution (H21) |