Taxing Fossil Fuels under Speculative Storage

BySemih Tumen, Deren Unalmis, Ibrahim Unalmis, Filiz D Unsal

December 18, 2014

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper investigates the mechanisms through which environmental taxes on fossil fuel usage can affect the main macroeconomic variables in the short-run. We concentrate on a particular mechanism: speculative storage. The existence of forward-looking speculators in the model improves the effectiveness of tax policies in reducing fossil fuel usage. Improved policy effectiveness, however, is costly: it drives inflation and interest rates up, while impeding output. Based on this tradeoff, we seek an answer to the question how monetary policy should interact with environmental tax policies in our DSGE model of fossil fuel storage.

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

Pages:
36
Volume:
2014
DOI:
https://doi.org/10.5089/9781475573688.001
Issue:
228
Series:
Working Paper No. 2014/228
Stock No:
WPIEA2014228
ISBN:
9781475573688
ISSN:
1018-5941

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