Regulation at the source? Comparing upstream and downstream climate policies

Joël Foramitti*, Ivan Savin, Jeroen C.J.M. van den Bergh

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

Abstract

Climate policies can be applied either upstream, where fossil fuels are extracted, or downstream, where emissions are generated. Specific policy instruments can be defined for either level, and can take the form of a price signal such as through a tax, or a quantity limit such as through direct regulation or a permit market. In this study, we present an agent-based model to compare the performance of these different instruments and regulation levels. Since policy coverage is often limited, i.e. not all firms being under the regulator's control, we also examine the impact of incomplete coverage on relative policy performance. Our analysis shows that only upstream regulation leads to an increase in fossil fuel prices, which is benefitial under limited coverage as it also affects firms not directly affected by the policy instruments; that prices under quantity-based regulation can decline after an initial peak, stabilizing at a lower level than under the tax; and that direct regulation is more efficient when applied upstream.

Original languageEnglish
Article number121060
JournalTechnological Forecasting and Social Change
Volume172
DOIs
Publication statusPublished - Nov 2021

Keywords

  • Agent-based modeling
  • Carbon leakage
  • Carbon tax
  • Climate policy
  • Emission trading
  • Quota

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