Leviathan governments and carbon taxes: Costs and potential benefits

This paper addresses positive aspects of the global warming debate that so far has been concerned by and large with normative issues. The paper considers a consumers' government that appreciates tax revenues as such (‘Leviathan’) in addition to conventional measures of welfare; i.e., carbon taxes serve the dual purpose of correcting for externalities — here global warming, or more generally, a stock externality from energy use — and of raising revenues. This government faces either a competitive or a perfectly cartelized supply. The major findings are: 1. (i) consumers may benefit from a Leviathan government that appropriates some of the monopoly rent by deterring preemption to some extent; 2. (ii) the Leviathan motive raises initial taxes and thereby lowers initial emissions but increases the long-run stock externality (in a play with linear strategies); 3. (iii) there exists a continuum of equilibria in nonlinear Markov strategies, which are, however, Pareto-inefficient compared with the linear strategies; 4. (iv) but in case of a binding resource constraint, nonlinear strategies are the only feasible ones.