Demand- versus Supply-Side Climate Policies with a Carbon Dioxide Ceiling

Consider a Hotelling model with a climate coalition and a fringe. The coalition’s policy keeps the CO2 concentration below a ceiling. The fringe ignores global warming and owns the fossil fuel endowment. If the coalition is price taker, with demand-side policy (capping domestic consumption) the coalition’s [the fringe’s] consumption is inefficiently low [high] until the ceiling binds. With supply-side policy (buying deposits), both countries’ consumption is inefficiently high until the ceiling binds. At this time, the price path is discontinuous and the coalition takes over complete supply. In an empirically calibrated economy the coalition’s welfare is higher under supply-side policy. Joint with Thomas Eichner, Gilbert Kollenbach, and Mark Schopf.

Keywords: demand-side policy, supply-side policy, climate change, deposit, fossil fuel
JEL Classification: F55, H23, Q54, Q58