Demand- Versus Supply-Side Climate Policies with a Carbon Dioxide Ceiling

In a Hotelling model with a climate coalition and a free-riding fringe, we compare demand-side and supply-side climate policies aimed at keeping CO₂ concentration below a ceiling equivalent to global warming of 2^∘ C. With the demand-side policy, the coalition caps its fuel demand. The corresponding allocation is intra-temporally distorted. With the supply-side policy, the coalition purchases deposits. The corresponding allocation is inter-temporally distorted and the fuel extraction path can be discontinuous. In an empirically calibrated economy, a medium-sized (the grand) coalition is stable with the demand-side (supply-side) policy. If the coalition acts strategically, the stable grand coalition implements first best.