NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Buy coal? Deposit markets prevent carbon leakage

Bård Harstad

NBER Working Paper No. 16119
Issued in June 2010
NBER Program(s):   EEE   PE   POL

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.

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Document Object Identifier (DOI): 10.3386/w16119

Published: “Buy Coal! A Case for Supply-Side Environmental Policy,” Journal of Political Economy 120 (1): 77-115

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