## 1. Oil Production and Consumption by Major Regions, 2003

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### I. Introduction — scope and questions
- Primary question:
  - What levels of petroleum taxes would countries consuming (and importing) petroleum, and countries producing (and exporting) petroleum, choose to set, in a world with full separation between consumer and producer countries, full coordination of strategies within each of the two groups, but no coordination between the groups?
- Secondary question:
  - What is the relative advantage of setting a tax versus setting a quota (as part of a “cap-and-trade” solution), in reducing petroleum demand?
- Geo-political framing:
  - Importers: OECD countries and high-growth Asian economies (importer block).
  - Exporters: OPEC and the former Soviet Union (exporter block).
  - Importers’ key interest: exporters do not pursue policies that limit supply.
  - Exporters’ key interest: importers do not pursue policies that limit demand.

### Roles of petroleum taxes
- Two main roles:
  - Correcting global externalities caused by carbon emissions:
    - In a united world the optimal worldwide tax is Pigouvian, i.e., equals the global marginal emission cost.
    - Practical difficulty: agreeing on the correct value of the externality is difficult; environmental problem is a stock externality while emissions are a current flow.
  - Strategic motivation under importer–exporter conflict:
    - When consumer countries tax more, a greater share of petroleum market rent goes to these countries and a smaller share to producer countries; and vice versa when producer countries tax more.

### Model framework and analytical approach
- Key assumptions and structure:
  - Petroleum is demanded and supplied by atomistic agents.
  - Demand and supply functions are both linear in price.
  - Petroleum supply is no direct instrument of policy for petroleum-exporting countries, but instead reacts to price signals.
- Analytical steps:
  - Individually optimal tax setting by consumer/importer cartel and by producer cartel, each taking the other’s tax as exogenous.
  - Derivation of Nash equilibrium (NE) where importer and producer taxes are simultaneously determined.
  - Comparison of NE to: (a) the welfare-optimizing tax from a global viewpoint; and (b) no taxation.
  - Stackelberg leadership solutions where one party is leader and the other follower.
  - Alternative solutions: quantity setting by importers (emissions quota); exporter as a “strong monopolist” setting petroleum price and output independently.

### Two key headline results
- Result 1:
  - When importers and exporters act in unified blocs but do not cooperate, each sets a positive tax, and the sum of taxes will be socially excessive (exceeding the Pigou level).
  - Rationale: Taxes combine externality-correcting motives and strategic rent-extraction motives.
- Result 2:
  - For the importer, setting an optimal tax is more favorable than setting an optimal quota.
  - Rationale: When importers set a quota and no tax, exporters are incentivized to set a higher export tax; thus quotas allocate a larger fraction of rents to exporters than importer taxes do.

### Model set-up and Nash equilibrium (summary of Sections II.A–II.C)
- Functional relations and policies:
  - Importer utility aggregated and quadratic in world petroleum consumption R.
  - Supply function: p + s = p0 + φR (as presented).
  - Importer tax t raises consumer price to p + t; producer excise tax s raises producer price to p0 + s.
- Importer and producer optimal taxes:
  - Importer optimal tax given by the paper’s equation (8) (preserved form in source).
  - Producer optimal tax given by the paper’s equation (14) (preserved form in source).
- Nash equilibrium:
  - NE solution for t and s given by the paper’s equations (16) and (17).
  - Aggregate tax z = s + t exceeds Pigou level and is given by the paper’s equation (18): in the linear example, "z is half of aggregate externalities plus 1-p0".
- Comparative statics (qualitative):
  - s and t are weighted sums of own externality (c2 for producers, c1 for importers) and a strategic component.
  - s increases in c2 and falls in c1; t behaves vice versa.
  - s affected relatively more by strategic factors when γ is greater (import demand inelastic); t affected more when φ is greater (supply inelastic).

### Benchmark solutions (Section III)
- Benchmark 1 — unified world welfare maximization:
  - Pigouvian aggregate tax z = c1 + c2 (stated as aggregate Pigouvian tax equals c1 + c2).
  - With NE tax setting the Pigou component is reduced to exactly half; NE taxes add rent-extraction, making overall NE tax exceed Pigou level.
  - Aggregate welfare under NE equals exactly 3/4 of maximized welfare (comparison of paper’s equations (27) and (23)).
- Benchmark 2 — no taxation:
  - No-tax consumption and price follow the model with s = t = 0.
  - Welfare loss relative to optimal taxation given by a Harberger-triangle expression (paper’s equation (29)).
  - NE vs no tax: condition (30) identifies a threshold of aggregate externality above which NE welfare exceeds no-tax welfare; threshold depends on 1-p0.
  - Unilateral taxation: if one party does not tax, the other gains by taxing optimally; the welfare gain of unilateral optimal importer tax when producers do not tax is given by paper’s equation (31) and is always positive.

### Stackelberg leadership (Section IV)
- Importer as Stackelberg leader:
  - Importer sets t taking exporter reaction into account (exporter reaction given by NE reaction function (16)).
  - In Stackelberg importer-leader case:
    - Importer tax t is greater than in the simultaneous NE.
    - Exporter tax s is lower than in NE.
    - Aggregate tax z is higher than in NE (paper’s Proposition 2 and equation (36)).
    - Petroleum output R is lower than in the simultaneous NE (paper’s equation (37)).
  - If producers lead, roles reverse: producer tax higher and consumer tax lower; leadership is advantageous for the leader.

### Other strategic cases (Section V)
- Importer quotas (tradable quotas) with no exporter taxes:
  - Importer quota set to optimize R given s = 0 yields R(Q) as in paper’s equation (38).
  - Equilibrium auction price q(0) equals the importer tax from equation (8); auction revenue equals tax revenue — quotas and taxes are identical from importers’ viewpoint when exporters do not tax.
- Importer quota with exporter optimal taxes:
  - Exporter sets s optimally given importer quota R(Q).
  - If R(Q) ≤ R(0) (R(0) defined by paper’s equation (39)), exporter produces R(Q) and sets s according to paper’s equation (40); equilibrium quota price in importer countries equals zero.
  - Importer welfare W1 (paper’s equation (42)) is strictly convex in R(Q); importers optimally choose R(0) (the highest feasible level).
  - Proposition 3: importer quota with exporter optimal tax yields same solution as zero importer tax; exporter tax, output and exporter utility higher, aggregate tax and importer utility lower than in NE.
  - Key strategic insight: quotas are less attractive for importers than taxes when exporters respond optimally, since exporters behave more aggressively under quotas (import demand perceived as more inelastic by exporter).
- Exporter “strong monopolist” (fixes price and satisfies demand):
  - Variant 1 (simultaneous NE): importer sets Pigouvian t = c1; resulting R is higher than in simultaneous NE because t is lower.
  - Variant 2 (importer Stackelberg leader): solution reverts to Stackelberg solution of Section IV.

### Key propositions and quantitative conclusions
- Proposition 1:
  - In non-cooperative NE for importer and producer petroleum taxes, total petroleum tax z = s + t exceeds Pigou level and is given by paper’s equation (18) (in the linear example, z equals half the sum of externalities plus 1-p0).
- NE aggregate welfare:
  - NE aggregate welfare equals exactly 3/4 of maximized world welfare (comparison of paper’s equations (27) and (23)).
- Proposition 2:
  - Importer Stackelberg leadership yields overall tax higher than in NE; z given by paper’s equation (36) with greater weight to 1-p0.
- Proposition 3:
  - Importer quota with exporter optimal tax yields same solution as zero importer tax; exporters extract higher rents, importers worse off relative to NE.
- Strategic relation:
  - Importer and exporter taxes are strategic substitutes — when one increases its tax, the other reduces its tax.
- Aggregate NE tax always exceeds Pigou level in the linear example; NE welfare can be lower than with no petroleum tax unless aggregate externality exceeds a threshold (condition given by paper’s equation (30)).

### Quotas versus taxes — summary of comparative insights
- Importers strictly prefer taxes to quotas whenever exporters act non-competitively.
- Under cap-and-trade (importer quota) with optimal exporter response:
  - Fossil-fuel consumption is greater under cap-and-trade than under importer tax.
  - Equilibrium petroleum import price for importing block is higher under cap-and-trade.
  - Equilibrium price to consumers in importing countries is lower under cap-and-trade.
- Intuition: taxation allows importers to extract rent from exporters directly; cap-and-trade does not deliver comparable rent extraction once exporters optimally respond.

### Policy-relevant observations on existing instruments
- Present policy gap:
  - No unified policy toward fossil-fuel taxation by major importers.
  - Few strong examples of fossil-fuel taxation: motor-fuels taxation in Europe; EU-ETS for greenhouse gas emissions.
- EU-ETS concerns noted:
  - High degree of free allocation of emission quotas to past emitters (at least 95 percent in the current trading period; at least 90 percent for the 2008-2012 period).
  - Free allocation provides windfall gains to emitters and reduces governments’ potential tax revenue.
  - Systemic weak incentives to deliver carbon reductions over time, since future free quotas tend to depend on current emissions.

### Model limitations, robustness, and extensions
- Stylized assumptions limit generality:
  - Full coordination within importer and exporter blocs assumed; relaxing coordination (less than full tax coordination among importers) would make importer taxation less aggressive.
  - Static model: supply behavior modeled as short-run response to current prices; does not capture expectation effects on extraction over time.
  - Competitive assumption for all consumers and producers is unrealistic; OPEC and other exporters do not behave competitively in practice.
- Suggested extensions:
  - Model OPEC and major exporters explicitly with exhaustibility.
  - Interactions with other energy markets (e.g., biofuels).
  - Account for uncertainty about externality costs or demand and supply functions.
  - Consider non-linear demand and supply functions.
- Robust general result:
  - Importer has strict preference for taxes over quotas in limiting fossil-fuel consumption whenever exporters act non-competitively.

### Table 1. Oil Production and Consumption by Major Regions, 2003 (Million tons)
- European Union: Oil Consumption 621, Oil Production 122, Oil Imports 578, Oil Exports 87
- North America: Oil Consumption 808, Oil Production 310, Oil Imports 552, Oil Exports 50
- OECD Pacific: Oil Consumption 341, Oil Production 24, Oil Imports 332, Oil Exports 15
- China: Oil Consumption 251, Oil Production 169, Oil Imports 91, Oil Exports 8
- Rest Asia: Oil Consumption 343, Oil Production 152, Oil Imports 261, Oil Exports 71
- Total, mainly oil importing regions: Oil Consumption 2364, Oil Production 777, Oil Imports 1814, Oil Exports 231
- Middle East: Oil Consumption 180, Oil Production 1040, Oil Imports 18, Oil Exports 878
- Former USSR: Oil Consumption 130, Oil Production 488, Oil Imports 52, Oil Exports 410
- Africa: Oil Consumption 97, Oil Production 373, Oil Imports 39, Oil Exports 315
- Latin America: Oil Consumption 164, Oil Production 312, Oil Imports 57, Oil Exports 205
- Total, mainly oil exporting regions: Oil Consumption 571, Oil Production 2213, Oil Imports 166, Oil Exports 1808

*Source: _wp0835 (IMF Working Paper excerpts — Sections I–V and Table 1).*

### 1. Oil Production and Consumption by Major Regions, 2003.................................................19

### 1. Oil Production and Consumption by Major Regions, 2003

### I. Introduction — scope and questions
- Paper addresses: What levels of petroleum taxes would countries consuming (and importing) petroleum, and countries producing (and exporting) petroleum, choose to set, in a world with full separation between consumer and producer countries, full coordination of strategies within each of the two groups, but no coordination between the groups?
- Secondary question: What is the relative advantage of setting a tax versus setting a quota (as part of a “cap-and-trade” solution), in reducing petroleum demand?
- Relevance: Policies to limit petroleum consumption are highly relevant in the context of greenhouse gas emissions control; some countries (e.g., the United States) see less need for international coordination, while Europe and Japan are more proactive (Kyoto Protocol context).
- Geo-political framing: OECD countries and high-growth Asian economies are large importers; OPEC and the former Soviet Union are large exporters. Importers’ key interest: exporters do not pursue policies that limit supply. Exporters’ key interest: importers do not pursue policies that limit demand.
- Coordination observations: OPEC already provides a high degree of exporter coordination; no similar cooperation is found on the demand side, but it may emerge if main fossil-fuel consuming countries initiate comprehensive greenhouse gas emission limits.

### Roles of petroleum taxes (two main roles)
- Correcting global externalities caused by carbon emissions:
  - In a united world where producers and consumers are one, the optimal worldwide tax is Pigouvian, i.e., equals the global marginal emission cost.
  - Practical difficulty: agreeing on the correct value of the externality is difficult due to intrinsic uncertainty and because most benefits accrue to future generations; environmental problem is a stock externality while emissions are a current flow.
- Strategic motivation under importer–exporter conflict:
  - When consumer countries tax more, a greater share of petroleum market rent goes to these countries and a smaller share to producer countries; and vice versa when producer countries tax more.

### Model framework and approach (summary of Sections II–V)
- Assumptions:
  - Petroleum is demanded and supplied by atomistic agents.
  - Demand and supply functions are both linear in price.
  - Petroleum supply is no direct instrument of policy for petroleum-exporting countries, but instead reacts to price signals.
- Analytical steps (as presented in the paper):
  - Individually optimal tax setting by: (a cartel of) consumer/importer countries; then (a cartel of) producers — in each case taking the tax set by the other party as exogenous.
  - Derivation of overall Nash equilibrium (NE) where importer and producer taxes are simultaneously determined.
  - Comparison of NE to two benchmarks: the welfare-optimizing tax from a global viewpoint; and no taxation at all (Section III).
  - Stackelberg solutions where one party (the importer) is leader and the other follower (Section IV).
  - Alternative solutions studied (Section V): quantity setting by importing countries (corresponding to a chosen emissions quota for greenhouse gases); exporter as a “strong monopolist” setting petroleum price and output independently.
  - Section VI sums up the analysis.

### Two key results highlighted
- Result 1:
  - When each of the groups of importers and exporters acts in a unified way in setting a petroleum tax, but the two groups do not cooperate, each will set a positive tax, and the sum of taxes will be socially excessive (in exceeding the Pigou level).
  - Rationale: Pressure for each side to tax arises from two reasons: (1) to counteract externalities from emissions; and (2) to act strategically to extract rent from the other party.
- Result 2:
  - For the importer, it is more favorable to set an optimal tax than to set an optimal quota.
  - Rationale: When the importer sets a quota and no tax, it puts the exporter in a stronger strategic position and encourages the exporter to set a higher tax than otherwise. A larger fraction of rents thus accrues to the exporter when quotas (under a “cap-and-trade” arrangement) are used, relative to when importer taxes are used.

*Source: IMF Working Paper excerpt — 1. Oil Production and Consumption by Major Regions, 2003*

### conclusions.

### conclusions.

### Literature context
- Existing literature largely treats environmental and strategic motivations for petroleum taxation separately; models often view petroleum as a non-renewable resource with competitive price time path subject to Hotelling’s (1931) rule.
- Key theoretical findings cited in the paper (preserved terminology and conclusions):
  - Proportional tax on resource rent has no effect on optimal extraction profile when there are no extraction costs (Dasgupta and Heal (1979)).
  - Time-inconsistency and credibility problems can arise in announced tax plans (Newbery (1976); Karp and Newbery (1991a, b); Newbery (2005)).
  - General equilibrium studies of environmentally-motivated petroleum taxation: Jorgenson, Slesnick and Wilcoxen (1992); Nordhaus (1993); Nordhaus and Yang (1996).
  - With exhaustibility considerations: Sinclair (1992, 1994); Ulph and Ulph (1994, 1997); results vary on whether optimal petroleum tax is higher or lower than Pigou level and whether it rises or falls over time.
  - When marginal extraction cost is upward rising and extraction is competitive, the globally optimal emissions tax is Pigouvian along the extraction path (Farzin (1996); Hoel and Kverndokk (1996); Strand (2007)).
  - Optimal tax mixes can include both ad valorem and specific fuel taxes, weights depending on revenue vs externality concerns (Keen and Strand (2006)).
  - Interaction with innovation may make optimal tax rising over time (Goulder and Mathai (2000)).
  - Strategic importer taxation literature: Markusen (1975) (Pigouvian plus import-tariff component); Bergstrom (1982) (importer excise burden tends to fall on exporter under certain assumptions).
  - Dynamic games between exporting and importing cartels: Rubio and Escriche (2001); Liski and Tahvonen (2004); Liski and Tahvonen find optimal importer tax consists of full Pigou tax plus import tariff element (overall tax generally higher than Pigou).

### Model set-up and Nash equilibrium (Sections II.A–II.C)
- Model assumptions and key functional forms:
  - Importer utility (aggregated) quadratic in world petroleum consumption R as in (1).
  - Supply function: p + s = p0 + φR (equation (2)).
  - Importer tax t raises consumer price to p+t; producer excise tax s raises producer price to p0 + s.
  - Importer first-order condition yields relation (4); solving system yields R and p given by (5) and (6).
- Importer optimal tax (taking producer response into account):
  - Optimal importer tax given by (8): t = [10(1) c p s ...] (preserved original equation form in paper).
  - Interpretation: t is a weighted sum of marginal externality c1 and net maximum rent 1-p0-s, with greater weight on c1; second term reflects non-competitive importer behavior and increases with φ (weaker supply response).
- Producer optimal tax:
  - Producer welfare W2 given by (10); producer supply maximization yields (2) and first-order condition (12).
  - Producer optimal s given by (14).
  - Producer utility decreases in importer tax t.
- Nash equilibrium (simultaneous non-cooperative tax setting):
  - NE solution for t and s given by (16) and (17).
  - Aggregate tax z = s + t exceeds Pigou level and is given by (18): z = 1/2 [c1 + c2 + (1- p0)] (preserved phrasing: "z is half of aggregate externalities plus 1-p0").
  - In the linear example, z is half of aggregate externalities plus 1-p0; since 1-p0 > c1 + c2, z must exceed Pigou level.
- Equilibrium outcomes (preserved equations and relations):
  - Producer price p: equation (19).
  - Petroleum output R: equation (20).
  - Importer and exporter welfare W1 and W2: equations (21) and (22).
  - Aggregate world welfare W: equation (23).
- Comparative statics insights:
  - s and t are both weighted sums of own externality (c2 for producers, c1 for importers) and a strategic (optimal-tariff) component.
  - s increases in c2 and falls in c1; t behaves vice versa.
  - s is affected relatively more by strategic factors when γ is greater (import demand inelastic), while t is affected more when φ is greater (supply inelastic).

### Benchmark solutions (Section III)
- Benchmark 1: Optimized world welfare (unified world government)
  - World welfare maximization yields Pigouvian aggregate tax z = c1 + c2 (equation (26): "zc = c + c2"? preserved as in text: "12 zc c =+, which is, of course, the Pigouvian tax" — interpreted in context: aggregate Pigouvian tax equals c = c1 + c2).
  - With NE tax setting, the Pigou aspect is reduced to exactly half; NE taxes add additional rent-extraction, making overall NE tax exceed Pigou level.
  - Maximized aggregate world welfare given by (27).
  - Aggregate welfare under NE equals exactly 3/4 of maximized welfare (comparison of (27) and (23)).
- Benchmark 2: No taxation
  - No-tax consumption and price follow (4)-(5) with s=t=0.
  - Aggregate welfare W(0) given by (28).
  - Welfare loss relative to optimal taxation W(*) is given by (29): proportional to square of externality (Harberger triangle).
  - Comparison NE vs no tax: condition (30) identifies threshold of aggregate externality above which NE welfare exceeds no-tax welfare; threshold can be high (depends on 1-p0).
  - Unilateral taxation: if one party does not tax, the other gains by taxing optimally; welfare gain of unilateral optimal importer tax when producers do not tax given by (31) (always positive).

### Stackelberg leadership (Section IV)
- Importer as Stackelberg leader (analyzed formally; exporter-leader case is parallel with γ and φ swapped):
  - Exporter reaction (16) used as response function; importer sets t taking reaction into account.
  - Optimality condition yields equation (33).
  - Solutions for t and s in Stackelberg importer-leader case given by (34) and (35).
  - Comparison to NE: t is greater and s is lower in Stackelberg case (importer uses leadership to raise own tax and induce follower to lower tax).
  - Proposition 2: overall tax z is higher than in NE and given by (36) (zst = ... preserving the formula structure that weights c and 1-p0 with γ and φ).
  - Petroleum output R is lower than in the simultaneous NE case (equation (37)).
  - If producers lead, roles reverse: producer tax higher and consumer tax lower; leadership is advantageous for the leader.

### Other strategic cases (Section V)
- Quantitative importer targets (tradable quotas) with no exporter taxes:
  - Importer quota set to optimize R given s=0 yields R(Q) as in (38).
  - Equilibrium auction price q(0) equals the importer tax from (8) (equation (8a) shows equality of quota price and optimal importer tax).
  - Auction revenue equals tax revenue; quota auction and tax scheme are identical from importers' viewpoint when exporters do not tax.
- Importer output targets with optimal exporter taxes:
  - Exporters set s optimally given importer quota R(Q); two subcases: supply equals R(Q) or less than R(Q).
  - If R(Q) ≤ R(0) (where R(0) defined by (39)), exporter produces R(Q); exporter sets s according to (40) to clear market; equilibrium quota price in importer countries equals zero.
  - Importer welfare W1 (equation (42)) is strictly convex in R(Q); importers optimally choose R(0) (highest feasible level).
  - Proposition 3: with importer quota and exporter optimal tax, solution equals case of zero importer tax; exporter tax, output and exporter utility higher, aggregate tax and importer utility lower than in NE.
  - Key strategic insight: quotas (quantitative constraints) are less attractive for importers than taxes when exporters respond with optimal taxes — exporter behaves more aggressively under quotas because demand is perceived as perfectly inelastic by the exporter.
  - Special case where R(0) may equal socially optimal R(*) when condition (43) holds.
- Exporters set both output price and quantity (strong cartel)
  - Variant 1 (simultaneous NE): importer maximizes (1) with p taken as constant, yielding t = c1 (Pigouvian). Resulting R given by (45); R higher than in simultaneous NE of Section II because t is lower (Pigouvian).
  - Variant 2 (importer is Stackelberg leader): back to Stackelberg solution of Section IV; no additional gain for exporter from setting p and R independently versus using an export tax.

### Key propositions and quantitative conclusions
- Proposition 1: In non-cooperative NE for importer and producer petroleum taxes, total petroleum tax z = s + t exceeds Pigou level and is given by (18) (z equals half the sum of externalities plus 1-p0 in the linear example).
- NE aggregate welfare equals exactly 3/4 of maximized world welfare (comparison of (27) and (23)).
- Proposition 2: Importer Stackelberg leadership yields overall tax higher than in NE; z given by (36) with greater weight to 1-p0.
- Proposition 3: Importer quota with exporter optimal tax yields same solution as zero importer tax; exporters extract higher rents, importers worse off relative to NE.
- Strategic substitutes: importer and exporter taxes are strategic substitutes — when one increases its tax, the other reduces its tax.
- Aggregate NE tax always exceeds Pigou level in the linear example; however, NE welfare can be lower than with no petroleum tax unless aggregate externality exceeds a threshold (see condition in (30)).

### Final synthesis
- Taxes set non-cooperatively by separated importer and exporter blocks combine Pigouvian motives and rent-extraction motives; both taxes are weighted sums of own externality and own market power.
- NE outcomes involve over-taxation relative to Pigouvian level (due to rent extraction), reduced world welfare (aggregate NE welfare = 3/4 of global optimum in the linear example), and potential cases where world welfare under NE is lower than with no taxation unless externalities are large enough.
- Strategic leadership and choice of instrument (tax vs quota) matter: leadership allows the leader to improve its outcome (raise its tax and induce lower tax by follower), and quotas are weak for importers when exporters optimally tax.

*Source: _wp0835 - conclusions.*

### Section IV studies a Stackelberg case where the importer group sets its tax before exporters.

### _wp0835 - Section IV studies a Stackelberg case where the importer group sets its tax before exporters.

### Stackelberg importer-leader case
- The importer tax is higher than in the NE, and the exporter tax lower.
- The aggregate tax is higher, since the importer’s increase is greater than the exporter’s reduction.
- A similar converse case holds when the producer cartel is a Stackelberg leader in tax setting.

### Quotas versus taxes (Section V, first case)
- The importer sets a quota for petroleum (with a cap-and-trade scheme for consumers) instead of an import tax.
- The optimal strategy of the exporter is to set a higher export tax (so high that the importer quota price is optimally set equal to zero ex post).
- As a result, setting an optimal quota is worse for the importer than setting an optimal tax.
- Given the choice, the importer would always choose a tax scheme instead of a cap-and-trade scheme for implementing a given fossil-fuel consumption.
- Fossil-fuel consumption, with its related emissions, is greater under a cap-and-trade scheme:
  - The equilibrium petroleum import price for the importing block will be higher under cap-and-trade.
  - The equilibrium price to consumers in importing countries will be lower under cap-and-trade.
- Intuition: importers are put in a better strategic position by taxing, as taxation leads to direct rent extraction from exporters. No similar rent extraction results from a cap-and-trade policy, given exporters’ optimal reactions.

### Producer “strong monopolist” case (Section V, second case)
- The producer fixes the petroleum export price and exactly satisfies demand at this price (acts as a “strong monopolist”).
- The importer takes the import price as given and sets a Pigouvian tax, lower than the NE tax.
- Such a policy is advantageous for the exporter and disadvantageous for the importer.

### Overall findings on taxation incentives
- When importers and exporters of petroleum behave as two optimizing blocks, both parties have incentives to tax petroleum aggressively, with overall taxes exceeding the Pigou level.
- The fraction of the tax that is motivated by externalities alone is always less than the Pigou level.
- This conclusion contrasts Rubio and Escriche (2001) and Liski and Tahvonen (2004), where the externality component is generally always Pigouvian.
- For the world, Pigou taxation is optimal.
- Viewed by importing countries in isolation, gains go beyond the Pigou level.
- Present-day policy does not reflect these incentives: there is today no unified policy toward fossil-fuel taxation by major importers, and little taxation at all, with the main imperfect examples being:
  - Motor-fuels taxation in Europe.
  - The EU-ETS trading scheme for greenhouse gas emissions initiated by European countries’ need to abide by GHG emission limitations under the Kyoto Protocol.
- The EU-ETS implies a positive cost of carbon emissions, but the scheme’s ability to significantly constrain overall fossil-fuel consumption (and emissions) is questionable.
  - Noted problems with the ETS include high degree of free allocation of emission quotas to past emitters (at least 95 percent in the current trading period; and at least 90 percent for the 2008-2012 period), providing high windfall gains to emitters and robbing governments of potential tax revenue.
  - The system’s lack of ability to deliver carbon reductions over time is also highlighted, since future free quotas tend to depend on current emissions.

### Model limitations, robustness, and extensions
- The paper relies on sweeping and stylized assumptions; results are in some respects not very general.
- Assumption: petroleum consuming and producing countries are separated into two separate blocks (consuming block largely OECD plus most of Asia; producing block consisting of the Middle East, the former Soviet Union, and a few countries in Africa and Latin America).
  - Imports by the former block, and exports by the latter, are each about half of world production.
  - Two major importers, the United States and China, both have significant oil production but large and growing net imports; their main interests are on the demand side.
- A relevant extension: allow for less than full tax coordination among importers (as in Bergstrom (1982)); this would make importer taxation strategies less aggressive and raises the issue whether Pigouvian (or higher) petroleum taxation is sustainable in a NE.
- Distinction between static analysis here and dynamic models:
  - Supply behavior is modeled as a short-run response to current prices, failing to capture effects through expectations about future petroleum prices (Farzin (1996), Hoel and Kverndokk (1996), Rubio and Escriche (2001), Liski and Tahvonen (2004), Strand (2007)).
  - Markov Perfect Nash Equilibrium models (Rubio and Escriche (2001), Liski and Tahvonen (2004)) take the opposite party’s policy variables as given and thus produce a full Pigouvian externality response; those models do not consider exporter taxes.
  - In the present model the environmental component of the tax is lower because both negative demand and supply effects of taxes are considered, giving strategic motivations to charge lower-than-Pigou environmental tax components.
- Competitive assumption for all petroleum consumers and producers is unrealistic; OPEC and other exporters do not behave competitively in practice and can complicate bilateral monopoly games.
- Further extensions warranted:
  - Modeling pricing and supply strategies by OPEC and other major exporters explicitly considering oil as an exhaustible resource.
  - Interactions with other energy markets (such as biofuels).
  - Accounting for uncertainty about externality costs or demand and supply functions.
  - Considering non-linear demand and supply functions.
- A notable general result from Section V: the importer has strict preference for taxes over quotas in limiting fossil-fuel consumption whenever exporters act non-competitively. This relies on the difference between price (tax) versus quantity (quota) setting as the importer’s strategic variable and is asserted to be simple and general.

### Table 1. Oil Production and Consumption by Major Regions, 2003 (Million tons)
- European Union: Oil Consumption 621, Oil Production 122, Oil Imports 578, Oil Exports 87
- North America: Oil Consumption 808, Oil Production 310, Oil Imports 552, Oil Exports 50
- OECD Pacific: Oil Consumption 341, Oil Production 24, Oil Imports 332, Oil Exports 15
- China: Oil Consumption 251, Oil Production 169, Oil Imports 91, Oil Exports 8
- Rest Asia: Oil Consumption 343, Oil Production 152, Oil Imports 261, Oil Exports 71
- Total, mainly oil importing regions: Oil Consumption 2364, Oil Production 777, Oil Imports 1814, Oil Exports 231
- Middle East: Oil Consumption 180, Oil Production 1040, Oil Imports 18, Oil Exports 878
- Former USSR: Oil Consumption 130, Oil Production 488, Oil Imports 52, Oil Exports 410
- Africa: Oil Consumption 97, Oil Production 373, Oil Imports 39, Oil Exports 315
- Latin America: Oil Consumption 164, Oil Production 312, Oil Imports 57, Oil Exports 205
- Total, mainly oil exporting regions: Oil Consumption 571, Oil Production 2213, Oil Imports 166, Oil Exports 1808

*Source: Section IV–V excerpts from _wp0835 (working paper PDF content provided).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp0835.pdf_