Optimal Unilateral Carbon Policy

Samuel Kortum and David A. Weisbach
Additional contact information
David A. Weisbach: The University of Chicago Law School

No 2311R1, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Climate policy by a coalition of countries can shift activities extraction, production, and consumptionÑto regions outside the coalition. We build a stylized general-equilibrium model of trade and carbon externalities to derive a coalitionÕs optimal Pareto-improving policy in such an environment. It can be implemented through: (i) a tax on fossil-fuel extraction at a rate equal to the global marginal harm from carbon emissions, (ii) a tax on imports of energy and goods, and a rebate of the tax on exports of energy but not goods, all at a lower rate per unit of carbon than the extraction tax rate, and (iii) a goods- specific export subsidy. This combination of taxes and subsidies exploits international trade to expand the policyÕs reach. It promotes energy efficient production and eliminates leakage by taxing the carbon content of goods imports and by encouraging goods exports. It controls the energy price in the non-taxing region by balancing supply-side and demand-side taxes. We use a quantitative version of the model to illustrate the gains achieved by the optimal policy and simpler variants of it. Combining supply-side and demand-side taxes generates first-order welfare improvements over current and proposed climate policies.

Pages: 82 pages
Date: 2024-12
New Economics Papers: this item is included in nep-ene, nep-env and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://cowles.yale.edu/sites/default/files/2024-12/d2311R1.pdf (application/pdf)

Related works:
Working Paper: Optimal Unilateral Carbon Policy (2021)
Working Paper: Optimal Unilateral Carbon Policy (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cwl:cwldpp:2311r1

Ordering information: This working paper can be ordered from
Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
The price is None.

Access Statistics for this paper

More papers in Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University Yale University, Box 208281, New Haven, CT 06520-8281 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Brittany Ladd ().