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Carbon Leakage in a Small Open Economy: The Importance of International Climate Policies

Ulrik R. Beck, Peter K. Kruse-Andersen and Louis B. Stewart
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Ulrik R. Beck: Danish Research institute for Economic Analysis and Modelling (DREAM)
Peter K. Kruse-Andersen: Department of Economics, University of Copenhagen
Louis B. Stewart: The Secretariat of the Danish Council on Climate Change

No 21-08, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: A substantial literature investigates carbon leakage effects for large countries and climate coalitions. However, little is known about leakage effects for a small open economy within a climate coalition. To fill this gap in the literature, we incorporate international climate policies relevant for a small open EU economy into the general equilibrium model GTAP-E. We focus our analysis on Denmark, but we show that our framework can be applied to any EU economy. We find substantial leakage associated with an economy-wide CO2e tax. This result is strongly affected by EU climate policies. We also present sector-specific leakage rates and find large sectoral differences.

Keywords: Carbon leakage; Trade and the environment; Climate policy; Computable general equilibrium (search for similar items in EconPapers)
JEL-codes: F18 H23 Q54 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-agr, nep-ene, nep-env, nep-int and nep-res
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