Abstract

http://ssrn.com/abstract=1946256
 


 



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


David Drake


Harvard Business School - Technology & Operations Management

August 17, 2012

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

Abstract:     
Carbon regulation is intended to reduce global emissions, but there is growing concern that such regulation may simply shift production to unregulated regions and increase global emissions in the process. Carbon tariffs have emerged as a possible mechanism to address these concerns by imposing carbon costs on imports at the regulated region's border. I show that, when firms choose from discrete production technologies and offshore producers hold a comparative cost advantage, carbon leakage can result despite the implementation of a carbon tariff. In such a setting, foreign firms adopt clean technology at a lower emissions price than firms operating in the regulated region, with foreign entry increasing only over emissions price intervals within which foreign firms hold this technology advantage. Further, domestic firms are shown to conditionally offshore production despite the implementation of a carbon tariff, adopting cleaner technology when they do so. As a consequence, when carbon leakage does occur under a carbon tariff, it conditionally decreases global emissions. Three sources of potential welfare improvement realized through carbon tariffs require both foreign comparative advantage and endogenous technology choice, underscoring the importance of considering both in value assessments of such a policy.

Number of Pages in PDF File: 44

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

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Date posted: October 19, 2011 ; Last revised: July 17, 2014

Suggested Citation

Drake, David, Carbon Tariffs: Effects in Settings with Technology Choice and Foreign Comparative Advantage (August 17, 2012). 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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