On the Geographic Implications of Carbon Taxes

52 Pages Posted: 18 Nov 2022 Last revised: 22 Nov 2022

See all articles by Bruno Conte

Bruno Conte

Università di Bologna

Klaus Desmet

Southern Methodist University (SMU); Centre for Economic Policy Research (CEPR)

Esteban Rossi-Hansberg

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 17, 2022

Abstract

A unilateral carbon tax trades off the distortionary costs of taxation and the future gains from slowing down global warming. Because the cost is local and immediate, whereas the benefit is global and delayed, this tradeoff tends to be unfavorable to unilateral carbon taxes. We show that this logic breaks down in a world with trade and migration where economic geography is shaped by agglomeration economies and congestion forces. Using a multisector dynamic spatial integrated assessment model (S-IAM), this paper predicts that a carbon tax introduced by the European Union (EU) and rebated locally can, if not too large, increase the size of Europe’s economy by concentrating economic activity in its high-productivity non-agricultural core and by incentivizing immigration to the EU. The resulting change in the spatial distribution of economic activity improves global efficiency and welfare. A unilateral carbon tax with local rebating introduced by the US generates similar global welfare gains. Other forms of rebating can dilute or revert this positive effect.

Suggested Citation

Conte, Bruno and Desmet, Klaus and Rossi-Hansberg, Esteban A., On the Geographic Implications of Carbon Taxes (November 17, 2022). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2022-154, Available at SSRN: https://ssrn.com/abstract=4279797 or http://dx.doi.org/10.2139/ssrn.4279797

Bruno Conte

Università di Bologna ( email )

Via Zamboni, 33
Bologna, 40126
Italy

Klaus Desmet

Southern Methodist University (SMU) ( email )

6212 Bishop Blvd.
Dallas, TX 75275
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Esteban A. Rossi-Hansberg (Contact Author)

University of Chicago - Department of Economics

1126 East 59th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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