Carbon Taxes and Energy Markets

Abstract

In this paper we shall consider the likely impact of a carbon tax of the type proposed by the EC (1990) on energy markets. There are a number of aspects involved in assessing such an impact. At the simplest level we can begin by asking what impact a carbon tax would have on the consumer and producer prices for fossil fuels, and more generally for all sources of energy. Even to answer this apparently simple question is non-trivial. As a first cut at the problem we could begin by assuming that there is a single world government that is imposing a global carbon tax. This will act to drive up the consumer prices of fossil fuels and drive down the producer prices of fossil fuels and the first question is what is the likely size of such effects; in particular, to what extent does our putative world government need to take account of the reduction in producer prices when calculating the carbon tax required to achieve a particular level of CO2 emissions reduction. To answer such questions we are essentially investigating the elasticities of supply and demand for fossil fuels, taking account of cross elasticities of demand.