Importer and Producer Petroleum Taxation: A Geo-Political Model

IMF Working Papers, February 1, 2008

Source details

Canonical URL: Importer and Producer Petroleum Taxation: A Geo-Political Model

Derives non-cooperative Nash equilibrium (NE) importer and exporter petroleum excise taxes given full within-group tax coordination, but no coordination between groups.
Assumes that importers do not produce and exporters do not consume petroleum.
Assumes petroleum consumption causes a global externality.

The aggregate NE tax consists of:
- an externality component, and
- an optimal tariff component.
The aggregate NE tax exceeds the standard Pigou tax.
The environmental component in isolation is less than the Pigou tax.
Under Stackelberg tax setting:
- the leader's tax is higher than in the NE,
- the follower's tax is lower than in the NE,
- the overall tax is higher than in the NE.
Importers prefer setting a tax instead of an import quota, because exporters' optimal response to a quota is a higher tax.
An optimal cap-and-trade scheme will fare worse than an optimal tax scheme for importers, and will imply greater petroleum consumption and carbon emissions.
When exporters behave as a cartel satisfying demand at a fixed export price:
- exporters' optimal tax is higher,
- importers' tax rule is Pigouvian,
- exporters gain at the expense of importers.

Taxation (optimal excise tax) can deliver a combined externality-plus-tariff outcome that exceeds the Pigou benchmark.
Stackelberg leadership in tax-setting raises global taxes relative to simultaneous NE, altering distributional outcomes between leaders and followers.
Quotas and cap-and-trade are dominated for importers by an optimal tax policy, due to exporters' strategic responses that raise consumption and emissions under quantity-based instruments.
Cartel behavior by exporters shifts surplus toward exporters and can undermine importer welfare even when importers adopt Pigouvian taxation.