MANAGING THE CLIMATE RENT: HOW CAN REGULATORS IMPLEMENT INTERTEMPORALLY EFFICIENT MITIGATION POLICIES?

This paper provides a formal framework to analyze informational and commitment requirements of several intertemporal price and quantity instruments for mitigating global warming. We ask under what conditions and to what extend the regulator can shift the complex and daunting intertemporal optimization of fossil resource use to markets. Mitigation always generates an intertemporal climate rent which reflects the stock‐dependent damages and emerging scarcities of the atmospheric carbon deposit. In order to calculate and to manage this climate rent appropriately, common policy instruments like Pigouvian taxes or emissions trading presume perfect information about resource demand, extraction costs, reserve sizes, and damages for the entire planning horizon. To reduce these informational requirements we develop an alternative policy approach—a state dependent tax rule—that relies only on current observations of cumulative extraction (or atmospheric carbon concentration). Within a cost–benefit analysis, this instrument is capable to shift the complex intertemporal optimization problem completely to the resource sector when resource owners are homogeneous. Under a cost‐effective carbon budget approach, emissions trading with banking and borrowing can also unburden the regulator from solving the intertemporal social planner optimization problem. Additionally, we discuss which instruments can obtain an optimal allocation even if resource owners employ discount rate mark‐ups (i.e., due to imperfect commitment or insecure property rights). While an emissions trading scheme without banking and borrowing is robust against discount rate mark‐ups, resource taxes have to be modified in order to achieve an optimal allocation.