A Third Benefit of Joint Non-OPEC Carbon Taxes: Transferring OPEC Monopoly Rent

Abstract

This paper highlights the potential for joint OECD (or non-OPEC) carbon taxes to reduce OPEC’s monopoly rent and provide benefit to non-OPEC countries provided jointly agreed trigger strategies are adhered to. In traditional economic theory, the primary purpose of a carbon tax is to internalize a global negative externality. A second benefit for individual countries is that the revenue raised by carbon tax can be used to reduce other tax rates and so lower the deadweight loss of tax system. In this paper, we discuss a third benefit of carbon taxes: transferring rents from OPEC to the oil importing countries. We develop a multi-region general equilibrium structure with endogenously determined oil supply for the purpose in which emissions are endogenously determined. We calibrate our model to 2006 data. Our analytics and numerical simulation results highlight how a uniform carbon tax used by all non-OPEC countries will increase the buyer’s price of oil but decrease the supplier’s price of oil, thus decreasing non-OPEC countries’ oil demand, and transferring OPEC monopoly rent to non-OPEC countries. Carbon taxes reduce the welfare of OPEC and increase the welfare of non-OPEC countries. Results also show how carbon taxes reduce global emissions, but the effect is small.