THE EFFECT OF EXISTING DISTORTIONS IN ENERGY MARKETS ON THE COSTS OF POLICIES TO REDUCE CO2 EMISSIONS: EVIDENCE FROM GREEN

Abstract

This paper highlights how the existence of distortions in energy markets could play an important role in designing a global strategy to curb CO2 emissions. Governments in many non-OECD countries appear to subsidise energy demand heavily. The existence of these subsidies has several implications. First, eliminating these subsidies is an obvious candidate for a no-regrets approach to the design of an international agreement. Second, the economic costs to the world as a whole of curbing global emissions are overestimated when energy subsidies in the non-OECD countries are not treated as explicit distortions. Third, an international agreement involving the elimination of existing subsidies before phasing-in carbon taxes could be achieved at virtually no cost for the non-OECD countries taken as a whole so long as carbon reductions are cost-effectively allocated across countries. (A) For the covering abstract see IRRD 866201.