Taxing Fossil Fuels under Speculative Storage Dec 2014 (IMF Working Paper)

This paper formulates and solves a dynamic stochastic general equilibrium (DSGE) model with nominal rigidities and an energy market (with exhaustible and renewable resources), where government implements tax policies to discourage fossil fuel usage. One distinctive feature of the model, which should perhaps be emphasized in advance, is the existence of a fossil fuel storage facility that allows for speculation. This facility operates through forwardlooking speculators, who maximize profits based on the (rational) expectations they form about the future movements in fossil fuel prices. Actions of these speculators may have important macroeconomic reflections; thus, may need to be taken into account in designing policy measures (e.g., environmental taxes) targeted at reducing fossil fuel usage - download

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