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

Abstract

In a Hotelling model with a climate coalition and a free-riding fringe, we compare demand-side and supply-side climate policies aimed at keeping CO2 concentration below a ceiling equivalent to global warming of 2○C. With the demand-side policy, the coalition caps its fuel demand. The corresponding allocation is intra-temporally distorted. With the supply-side policy, the coalition purchases deposits. The corresponding allocation is inter-temporally distorted and the fuel extraction path can be discontinuous. In an empirically calibrated economy, a medium-sized [the grand] coalition is stable with the demand[supply]-side policy If the coalition acts strategically, the stable grand coalition implements first best.