Optimal Energy Taxes and Subsidies under a Cost-Effective Unilateral Climate Policy: Addressing Carbon Leakage

37 Pages Posted: 27 Nov 2019

See all articles by Peter Kruse-Andersen

Peter Kruse-Andersen

University of Copenhagen - Department of Economics

Peter Birch Sørensen

University of Copenhagen - Department of Economics

Date Written: 2019

Abstract

We analyze how a country pursuing a unilateral climate policy may contribute to a reduction in global CO2 emissions in a cost-effective way. To do so its system of energy taxes and subsidies must account for leakage of emissions from the domestic to the foreign economy. We focus on leakage occurring via international trade in electricity and via shifts between domestic and foreign production of other goods. The optimal tax-subsidy scheme is based on an intuitive principle: Impose a uniform carbon tax on all additions to global emissions caused by changes in domestic production and consumption of energy, including additions to emissions occurring via shifts in international trade. Emissions from the sector exposed to foreign competition should be taxed at reduced rates to avoid excessive carbon leakage, and a part of the carbon tax on electricity should be levied at the consumer rather than the producer level to ensure taxation of the carbon content of imported electricity. Producers of renewables-based electricity should receive a subsidy to internalize their contribution to the reduction of global emissions. In other sectors emissions should be taxed at a uniform rate corresponding to the marginal social cost of meeting the target for emissions reduction. Simulations calibrated to data for the Danish economy suggest that redesigning energy taxes and subsidies to account for carbon leakage can generate a welfare gain.

Keywords: optimal unilateral climate policy, carbon leakage, optimal energy taxes and subsidies

JEL Classification: H210, H230, Q480, Q540

Suggested Citation

Kruse-Andersen, Peter and Birch Sørensen, Peter, Optimal Energy Taxes and Subsidies under a Cost-Effective Unilateral Climate Policy: Addressing Carbon Leakage (2019). CESifo Working Paper No. 7920. Available at SSRN: https://ssrn.com/abstract=3480926

Peter Kruse-Andersen (Contact Author)

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Peter Birch Sørensen

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
19
Abstract Views
98
PlumX Metrics