Negative Leakage

14 Pages Posted: 2 May 2011

See all articles by Don Fullerton

Don Fullerton

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Daniel H. Karney

University of Illinois at Urbana-Champaign

Kathy Baylis

University of Illinois at Urbana-Champaign - College of Agricultural, Consumer and Environmental Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: April 2011

Abstract

We build a simple analytical general equilibrium model and linearize it, to find a closed-from expression for the effect of a small change in carbon tax on leakage - the increase in emissions elsewhere. The model has two goods produced in two sectors or regions. Many identical consumers buy both goods using income from a fixed stock of capital that is mobile between sectors. An increase in one sector's carbon tax raises the price of its output, so consumption shifts to the other good, causing positive carbon leakage. However, the taxed sector substitutes away from carbon into capital. It thus absorbs capital, which shrinks the other sector, causing negative leakage. This latter effect could swamp the former, reducing carbon emissions in both sectors.

Suggested Citation

Fullerton, Don and Karney, Daniel H. and Baylis, Kathy, Negative Leakage (April 2011). NBER Working Paper No. w17001. Available at SSRN: https://ssrn.com/abstract=1825782

Don Fullerton (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 244-3621 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Daniel H. Karney

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Kathy Baylis

University of Illinois at Urbana-Champaign - College of Agricultural, Consumer and Environmental Sciences ( email )

Champaign, IL 61820
United States

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