Supply-side elasticities as determinants of optimal carbon taxation

Simon Christiansen and Cecilie Marie Løchte Jørgensen

Economics Letters, 2025, vol. 247, issue C

Abstract: Consider an open economy with two polluting production inputs, whose policymakers decide to implement a unilateral carbon tax on the use of the inputs. The one-sided policy introduces a leakage externality whose magnitude depends on the price responses of the polluting inputs. We show that the optimal tax on a polluting input decreases when the relative supply-price elasticity increases. The intuition is that inputs with low supply-price elasticities experience larger price decreases in response to taxes, which incentivises the producers in the non-taxing country to use more of them. The policymaker avoids this by taxing the elastic inputs the most.

Keywords: Non-cooperative climate policy; Leakage; Pigouvian taxes; Second-best taxes; Differentiated carbon taxes; General equilibrium (search for similar items in EconPapers)
JEL-codes: E61 H21 H23 Q48 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:247:y:2025:i:c:s016517652500031x

DOI: 10.1016/j.econlet.2025.112194

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