Carbon taxes in a trading world

We study a dynamic game involving an oil exporting cartel and a coalition of importing countries that impose carbon taxes.  First, we derive the optimal pricing and resource taxation policies to maximize the world welfare from the social planner’s point of view. Then, we prove that there exists a unique Nash equilibrium where countries use feedback strategies. Finally, the Stackelberg leader-follower equilibria are derived under the leadership of the cartel and importing coalition, respectively. The welfare levels are compared among social planning, Nash and Stackelberg solutions.