Kyoto, Optimal Tariffs and the $50 Trillion Free Lunch

The major argument against climate change treaties (like the Kyoto Agreement) is that they would reduce economic activity. On the contrary, in this paper we show that a revenue neutral tax on crude (returned as a lump sum payment to consumers) would achieve a reduction in consumption of oil (to the benefit of the climate) and provide a huge stimulus to the US economy. For the tax to have the desired impact (wealth transfer and consumption reduction) the oil importing countries need to act together. This paper analyzes a situation where all oil importing countries (grouped together and referred to as quot;domestic countriesquot;) impose a common tariff. The quot;optimal tariffquot; would result in improved terms of trade which would transfer wealth from the crude exporting (foreign) countries to the domestic countries. The optimal tariff is found to be 354% to 826%, and this results in a capitalized surplus transfer in the range of $41.40 trillion to $54.35 trillion. This transfer is a free lunch, the importing countries do not have to expend any resources to obtain surplus (beyond imposing the tariff). The surplus gain for the United States is in the range of $87.54 billion to $114.66 billion a year (depending upon the demand and supply elasticities), and the capitalized value of the surplus from $10.79 trillion to $14.16 trillion. The new tax revenues to the US government from tax on imported oil is $156.16 billion to $422.79 billion a year, which can be returned to the US consumers as a lump sum so as not to increase the tax burden. The reduction in crude oil consumption worldwide ranges from 4.51% to 8.75%