The Grey Paradox: How Fossil-fuels Owners Can Bene t From Carbon Taxation.∗

This paper studies the distributional impacts of optimal carbon taxation on fossilfuels owners. We show that optimal carbon taxation can increase the pro ts of owners of a carbon-emitting exhaustible resource. Such phenomenon contrasts with claims from fossil-fuels owners especially from OPEC member countries that carbon taxation will undermine their pro ts. 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 e ect ), but the dirtier resource is made less competitive (the competition e ect ). We determine conditions under which pro ts 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 nd that limiting cumulative new emissions in this sector between 322.7 and 637.5 GtCO2 increases pro ts of conventional-oil owners.