Non-Cooperative Climate Policies among Asymmetric Countries: Production- versus Consumption-based Carbon Taxes

Noha Elboghdadly and Michael Finus ()

No 2020-16, Graz Economics Papers from University of Graz, Department of Economics

Abstract: Non-cooperative production-based carbon taxes might be set inefficiently low due to the concern of governments about carbon leakage and the loss of competitiveness of their industries. In a strategic trade model, we study the effect of a gradual shift from bilateral production- to unilateral or bilateral consumption-based carbon taxes, considering various forms of border carbon adjustments (BCAs). We analyse the optimal response of two countries in a non-cooperative policy game. We show that if the environmentally more concerned government shifts unilaterally to a consumption-based policy, BCAs on imports create a new incentive for the optimal tax structure. Although profit-shifting and carbon leakage distortions are gradually reduced or even eliminated by combining carbon tariffs with export rebates, the optimal tax may still be below individual marginal damages in strategic setting. In contrast, a bilateral consumption-based tax, could be set equal to or even above individual marginal damages. In equilibrium, all forms of BCAs could allow both governments to set higher carbon taxes than under a bilateral production-based tax regime. However, BCA-regimes which add export rebates to import tariffs should be chosen carefully, as they may actually increase global emissions.

Keywords: Carbon Taxes; Border Carbon Adjustments; Carbon Leakage-shifting Effect; Profit-shifting Effect; Consumer Effect; Tariffs and Export Rebate Income Effect. (search for similar items in EconPapers)
JEL-codes: C72 F12 F18 H23 Q58 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-ene, nep-env, nep-int and nep-reg
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