Can a Unilateral Carbon Tax Reduce Emissions Elsewhere?

26 Pages Posted: 15 Mar 2013 Last revised: 1 Jun 2013

See all articles by Joshua Elliott

Joshua Elliott

University of Chicago; Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP)

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)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2013

Abstract

One country that tries to reduce greenhouse gas emissions may fear that other countries get a competitive advantage and increase emissions ("leakage"). Estimates from computable general equilibrium (CGE) models such as Elliott et al (2010a,b) indicate that 15% to 25% of abatement might be offset by leakage. Yet the Fullerton et al (2012) analytical general equilibrium model shows an offsetting term with negative leakage. To derive analytical expressions, their model is quite simple, with only one good from each country or sector, a fixed stock of capital, competitive markets, and many identical consumers that purchase both goods. Their model is not intended to be realistic, but only to demonstrate the potential for negative leakage. Most CGE models do not allow for negative leakage. In this paper, we use a full CGE model with many countries and many goods to measure effects in a way that allows for negative leakage. We vary elasticities of substitution and confirm the analytical model's prediction that negative leakage depends on the ability of consumers to substitute into the untaxed good and the ability of firms to substitute from carbon emissions into labor or capital.

Suggested Citation

Elliott, Joshua and Fullerton, Don, Can a Unilateral Carbon Tax Reduce Emissions Elsewhere? (March 2013). NBER Working Paper No. w18897. Available at SSRN: https://ssrn.com/abstract=2233788

Joshua Elliott (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP) ( email )

5735 S. Ellis Street
Chicago, IL 60637
United States

Don Fullerton

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

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