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

Bowei Guo and David M Newbery

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Note - The change in title and this paper replaces CWPE1951. 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 2015-2020 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.

Keywords: Carbon tax; Bilateral trading; Carbon leakage; Electricity market (search for similar items in EconPapers)
JEL-codes: C13 D61 F14 Q48 (search for similar items in EconPapers)
Date: 2020-03-10
New Economics Papers: this item is included in nep-ene, nep-env and nep-int
Note: bg347,dmgn
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Citations: View citations in EconPapers (6)

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