Taxing Fossil Fuels under Speculative Storage

Taxing Fossil Fuels under Speculative Storage

Title:

Taxing Fossil Fuels under Speculative Storage

Number:

15/02

Author(s):

Semih Tümen, Deren Ünalmış, İbrahim Ünalmış, D. Filiz Ünsal

Language:

English

Date:

January 2015

Abstract:

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.

Keywords:

Fossil fuel, Environmental taxes, Speculative storage, DSGE

JEL Codes:

E31; E52; H23; O44

Taxing Fossil Fuels under Speculative Storage
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