Optimal Emission Pricing in the Presence of International Spillovers: Decomposing Leakage and Terms-of-Trade Motives

Christoph Böhringer, Andreas Lange and Thomas F. Rutherford
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Thomas F. Rutherford: ETH Zürich, CEPE, Switzerland

No V-347-12, Working Papers from University of Oldenburg, Department of Economics

Abstract: Carbon leakage provides an efficiency argument for unilateral climate policy to differentiate emission prices in favor of emission-intensive and trade-exposed sectors. At the same time, differential emission pricing can be (mis-)used as a beggar-thy-neighbor policy to exploit terms of trade. Using an optimal tax framework, we propose a method to decompose the leakage motive and the terms-of-trade motive for emission price differentiation. We employ our method for a quantitative impact assessment of unilateral climate policy based on empirical data. We find that the leakage motive yields only small efficiency gains compared to uniform emission pricing. Likewise, the terms-of-trade motive has rather limited potential for strategic burden shifting. We conclude that the simple first-best rule of uniform emission pricing remains a practical guideline for unilateral climate policy design.

Keywords: optimal taxation; emission leakage; terms of trade (search for similar items in EconPapers)
JEL-codes: D58 H21 Q43 R13 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2012-06, Revised 2012-06
New Economics Papers: this item is included in nep-env and nep-res
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Citations: View citations in EconPapers (1)

Published in Oldenburg Working Papers V-347-12

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http://www.vwl.uni-oldenburg.de/download/V-347-12.pdf First version, 2012 (application/pdf)

Related works:
Journal Article: Optimal emission pricing in the presence of international spillovers: Decomposing leakage and terms-of-trade motives (2014)
Working Paper: Optimal Emission Pricing in the Presence of International Spillovers: Decomposing Leakage and Terms-of-Trade Motives (2010)
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