The Cost of Carbon Leakage: Britain's Carbon Price Support and Cross-border Electricity Trade

Bowei Guo and David Newbery

The Energy Journal, 2023, vol. Volume 44, issue Number 1

Abstract: Carbon taxes create global benefits unless offset by increased emissions elsewhere. An additional carbon tax in one country may cause leakage through imports and will also increase costs by creating a wedge between economic marginal costs in different markets, causing an offsetting deadweight loss. We estimate the global benefit, carbon leakage and deadweight cost of the British Carbon Price Support (CPS) on GB's cross-border electricity trade with France and The Netherlands. Over 20152020 the unilateral CPS created ¬72±20 m/yr deadweight loss, about 31% of the initial economic value created by the interconnector, or 2.5% of the global emissions benefit of the CPS at ¬2.9±0.1 bn/yr. About 16.3±3.5% of the CO2 emissions reduction is undone by France and The Netherlands, the monetary loss of which is about ¬584±127 m/yr.

JEL-codes: F0 (search for similar items in EconPapers)
Date: 2023
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