Abstract

http://ssrn.com/abstract=1946256
 
 

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Carbon Tariffs: Effects in Settings with Technology Choice and Foreign Production Cost Advantage


David Drake


Harvard Business School - Technology & Operations Management

November 17, 2015

Harvard Business School Technology & Operations Mgt. Unit Working Paper No. 13-021

Abstract:     
It is widely believed that carbon leakage — offshoring and foreign entry in response to carbon regulation — increases global emissions. It is also widely believed that a carbon tariff — imposing carbon costs on imports entering the emission-regulated region — would eliminate carbon leakage. However, neither of these assertions necessarily holds. Under a carbon tariff, foreign firms with a production cost advantage adopt clean technology at a lower emissions price than domestic firms, and foreign entry can increase in emissions price when foreign firms hold this edge. Further, domestic firms conditionally offshore production despite a carbon tariff, but doing so implies that they adopt cleaner technology. Therefore, carbon leakage can arise under a carbon tariff but, under mild conditions, it decreases global emissions. Due in part to this clean leakage, imposing a carbon tariff is shown to decrease global emissions. However, domestic firm profits can increase, decrease, or remain unchanged due to a carbon tariff. This suggests a carbon tariff’s principal benefit is not to protect domestic firm profits, as some argue. Rather, it is to improve emissions regulation efficacy, enabling emissions price to be used to reduce global emissions in many settings in which it would otherwise fail to do so.

Number of Pages in PDF File: 33

Keywords: Carbon regulation, Carbon leakage, Technology choice, Imperfect competition


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Date posted: October 19, 2011 ; Last revised: November 18, 2015

Suggested Citation

Drake, David, Carbon Tariffs: Effects in Settings with Technology Choice and Foreign Production Cost Advantage (November 17, 2015). Harvard Business School Technology & Operations Mgt. Unit Working Paper No. 13-021. Available at SSRN: http://ssrn.com/abstract=1946256 or http://dx.doi.org/10.2139/ssrn.1946256

Contact Information

David Drake (Contact Author)
Harvard Business School - Technology & Operations Management ( email )
Boston, MA 02163
United States
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