Taxing Consumption to Mitigate Carbon Leakage

Kevin R. Kaushal () and Knut Einar Rosendahl
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Kevin R. Kaushal: Statistics Norway

Environmental & Resource Economics, 2020, vol. 75, issue 1, No 7, 181 pages

Abstract: Abstract Unilateral actions to reduce CO2 emissions could lead to carbon leakage such as relocation of emission-intensive and trade-exposed industries (EITE). To mitigate such leakage, countries often supplement an emissions trading system (ETS) with free allocation of allowances to exposed industries, e.g. in the form of output-based allocation (OBA). This paper examines the welfare effects of supplementing OBA with a consumption tax on EITE goods. In particular, we investigate the case when only a subset of countries involved in a joint ETS introduces such a tax. The analytical results suggest that the consumption tax would have unambiguously global welfare improving effects, and have welfare improving effects for the tax introducing country as well unless there are strong unfavorable terms-of-trade effects. Numerical simulations in the context of the EU ETS support the analytical findings, including that the consumption tax is welfare improving for the single country that implements the tax.

Keywords: Carbon leakage; Consumption tax; Emission trading system; Output-based allocation; Unilateral policy (search for similar items in EconPapers)
JEL-codes: D61 F18 H23 Q54 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (11)

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Working Paper: Taxing consumption to mitigate carbon leakage (2017)
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DOI: 10.1007/s10640-019-00392-1

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