Leakage, Welfare, and Cost-Effectiveness of Carbon Policy

15 Pages Posted: 19 Feb 2013

See all articles by Kathy Baylis

Kathy Baylis

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

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 18, 2013

Abstract

We extend the model of Fullerton, Karney, and Baylis (2012 working paper) to explore cost-effectiveness of unilateral climate policy in the presence of leakage. We ignore the welfare gain from reducing greenhouse gas emissions and focus on the welfare cost of the emissions tax or permit scheme. Whereas that prior paper solves for changes in emissions quantities and finds that leakage maybe negative, we show here that all cases with negative leakage in that model are cases where a unilateral carbon tax results in a welfare loss. With positive leakage, however, a unilateral policy can improve welfare.

Keywords: trade and environment, pollution havens, unilateral climate policy

JEL Classification: H230, Q280, Q480, Q580

Suggested Citation

Baylis, Kathy and Fullerton, Don and Karney, Daniel H., Leakage, Welfare, and Cost-Effectiveness of Carbon Policy (February 18, 2013). CESifo Working Paper Series No. 4101. Available at SSRN: https://ssrn.com/abstract=2220098

Kathy Baylis

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

Champaign, IL 61820
United States

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

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