Consider the inter-temporal leakage problem from section 12.6.3. Assume the extraction cost depend on the remaining stock – i.e. in the second period the extraction cost function is given by T (e₂, S- e₁), where T2 0, so that a higher remaining stock leads to lower extraction costs. Determine the impact of a second period emission tax increase. Distinguish the cases where the resource is fully depleted and where it is not.

Data from section 12.6.3

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Consider now a context in which the world community has reached agreement on a coordinated carbon emissions reduction strategy, which will become binding at some future date. We now interpret C, (e)+, as the global opportunity cost of reducing emissions/energy use in period t, where is the time-indexed energy input price. We assume there are two time