Taxing Fossil Fuels under Speculative Storage
IMF Working Papers, December 18, 2014
Source details
- Canonical URL
- Taxing Fossil Fuels under Speculative Storage
Other formats
Bibliographic details
- Authors: Semih Tumen, Deren Unalmis, Ibrahim Unalmis, Filiz D Unsal
- Published: December 18, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475573688.001
Summary
- Investigates mechanisms through which environmental taxes on fossil fuel usage affect main macroeconomic variables in the short-run.
- Focuses on speculative storage as a particular mechanism: forward-looking speculators in the model improve the effectiveness of tax policies in reducing fossil fuel usage.
- Highlights a tradeoff: improved policy effectiveness raises inflation and interest rates while impeding output.
- Uses a DSGE model of fossil fuel storage to analyze how monetary policy should interact with environmental tax policies.
Main findings
- Speculative storage amplifies the effectiveness of environmental taxes in reducing fossil fuel usage.
- The enhanced effectiveness of taxes comes with macroeconomic costs:
- Drives inflation up.
- Raises interest rates.
- Impedes output.
- The presence of forward-looking speculators materially alters the short-run transmission of environmental taxes to prices and quantities.
Policy implications and monetary policy interaction
- Monetary policy must be designed to account for the inflationary and interest-rate consequences of environmental taxes when speculative storage is present.
- The paper seeks an answer to how monetary policy should interact with environmental tax policies within the DSGE framework of fossil fuel storage, given the tradeoff between emissions reduction and macroeconomic stability.
Subjects and keywords
- Subject: Consumption, Environment, Environmental taxes, Inflation, National accounts, Non-renewable resources, Prices, Renewable energy, Taxes
- Keywords: capital adjustment cost, Consumption, consumption basket, consumption goods, cost minimization problem, CPI rise, demand shock, DSGE, energy price inflation, environmental taxes, Fossil fuel, fossil fuel storage, Inflation, inflation indexation parameter, Middle East, minimization problem, monetary policy, Non-renewable resources, Renewable energy, South America, speculative storage, storage demand, storage facility, WP
IMF Working Paper — “Taxing Fossil Fuels under Speculative Storage” (Working Paper No. 2014/228), December 18, 2014.