Carbon Leakage in a Small Open Economy with Capital Mobility

18 Pages Posted: 5 Aug 2001

See all articles by Roberto Roson

Roberto Roson

Ca Foscari University of Venice - Dipartimento di Economia; Bocconi University - IEFE Centre for Research on Energy and Environmental Economics and Policy; Loyola Andalucia University

Date Written: July 2001

Abstract

The carbon emissions abatement, undertaken by some countries, may induce other countries to increase their own emissions. This effect, known as - carbon leakage, may be due to rather different mechanisms. The simplest case is when outside countries do not change their environmental policies and world prices are fixed. Unilateral policies may then induce a substitution of domestic production, generating emissions, with imports. This paper analyses the carbon leakage generated under the - small open economy - assumption, illustrating some findings through a numerical, dynamic, general equilibrium model of the Italian economy. The analysis highlights two main points. First, in a general equilibrium setting, the carbon leakage depends on both the substitution and income effects. Income effects, in turn, crucially depend on how carbon tax revenues are recycled, or pollution rights rents are assigned. Different recycling schemes have rather different impacts on the national income and on the trade-induced leakage. Second, carbon leakage may be significantly affected by the degree of capital mobility in international markets, because capital services enter the balance of trade. Capital outflows amount to exports of capital services, possibly financing the import of carbon-intensive goods. This result suggests that, in a world of increasingly integrated financial markets, unilateral environmental policies are becoming less effective, because of the existence of policy spill-overs.

Keywords: Carbon leakage, Computable General Equilibrium, carbon taxation, capital mobility

JEL Classification: D31, D58, D91, E62, Q28

Suggested Citation

Roson, Roberto, Carbon Leakage in a Small Open Economy with Capital Mobility (July 2001). FEEM Working Paper No. 50.2001, Available at SSRN: https://ssrn.com/abstract=278534 or http://dx.doi.org/10.2139/ssrn.278534

Roberto Roson (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

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Venice, 30121
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+39 041 2349147 (Phone)
+39 041 2349176 (Fax)

HOME PAGE: http://venus.unive.it/roson

Bocconi University - IEFE Centre for Research on Energy and Environmental Economics and Policy ( email )

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Milan, 20122
Italy

Loyola Andalucia University ( email )

Escritor Castilla Aguayo no. 4
Cordoba, CORDOBA 14004
Spain

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