Resource rents: The effects of energy taxes and quantity instruments for climate protection

Carbon dioxide emissions correspond to fossil resource use. When considering this supply side of climate protection, crucial questions come to fore. It seems likely that owners of fossil resources would object to emission reductions. Moreover, policy instruments such as taxes may not be effective at all: it seems individually rational to leave no fossil resources unused. In this context, it can be expected that economic sectors will react strategically to climate policy, aiming at a re-distribution of rents. To address these questions, we investigate the effectiveness, efficiency, and resource rents for energy taxes, resource taxes, and quantity rationing of emissions. The analysis is based on a game theoretic growth model with explicit factor markets and policy instruments. Market equilibrium depends on a government that acts as a Stackelberg leader with a climate protection goal. We find that resource taxes and quantity rationing achieve this objective efficiently, energy taxation is only second-best. The use of quantity rationing to achieve climate protection generates substantial rents for resource owners. & 2012 Elsevier Ltd. All rights reserved.