The Strategic Value of Carbon Tariffs

41 Pages Posted: 9 Jan 2014

See all articles by Christoph Böhringer

Christoph Böhringer

University of Oldenburg - Economic Policy; Centre for European Economic Research (ZEW)

Jared C. Carbone

Colorado School of Mines

Thomas Rutherford

University of Wisconsin - Madison

Multiple version iconThere are 2 versions of this paper

Date Written: October 31, 2013

Abstract

Unilateral carbon policies are inefficient due to the fact that they generally involve emission reductions in countries with high marginal abatement costs and because they are subject to carbon leakage. In this paper, we ask whether the use of carbon tariffs — tariffs on the carbon embodied in imported goods — might lower the cost of achieving a given reduction in world emissions. Specifically, we explore the role tariffs might play as an inducement to unregulated countries adopting emission controls of their own. We use an applied general equilibrium model to generate the payoffs of a policy game. In the game, a coalition of countries regulates its own emissions and chooses whether or not to employ carbon tariffs against unregulated countries. Unregulated countries may respond by adopting emission regulations of their own, retaliating against the carbon tariffs by engaging in a trade war, or by pursuing no policy at all. In the unique Nash equilibrium produced by this game, the use of carbon tariffs by coalition countries is credible. China and Russia respond by adopting binding abatement targets to avoid being subjected to them. Other unregulated countries retaliate. Cooperation by China and Russia lowers the global welfare cost of achieving a 10% reduction in global emissions by half relative to the case where coalition countries undertake all of this abatement on their own.

Keywords: climate policy, border tax adjustments, carbon leakage, strategic retaliation, applied general equilibrium model

JEL Classification: D58, H2, Q43, Q54

Suggested Citation

Bohringer, Christoph and Carbone, Jared C. and Rutherford, Thomas, The Strategic Value of Carbon Tariffs (October 31, 2013). ZenTra Working Paper in Transnational Studies No. 26 / 2014, Available at SSRN: https://ssrn.com/abstract=2375815 or http://dx.doi.org/10.2139/ssrn.2375815

Christoph Bohringer (Contact Author)

University of Oldenburg - Economic Policy ( email )

Centre for European Economic Research (ZEW) ( email )

D-68161 Mannheim
Germany
+49 6211235200 (Phone)
+49 6211235226 (Fax)

Jared C. Carbone

Colorado School of Mines ( email )

1500 Illinois Street
Golden, CO 80401
United States

HOME PAGE: http://www.mines.edu/~jcarbone

Thomas Rutherford

University of Wisconsin - Madison ( email )

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