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Carbon Tax, Emission Standards, and Carbon Leak Under Price Competition

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  • Paolo Giorgio Garella

    (Università degli Studi di Milano)

  • Maria Teresa Trentinaglia

    (Università degli Studi di Milano)

Abstract

We consider a two-country model of price competition, with one polluting firm in each country and differentiated products. Assuming away, to simplify, abatement efforts and input substitution, we compare the impact on output, leakages, and trade volumes of a carbon tax versus an emission standard policy, unilaterally enacted by the home country. Under the tax the two firms set their prices simultaneously, in a Bertrand game. Under the standard the home firm’s price is conditioned on the price of the foreign firm, so as to abide the emission constraint. As a result, the tax leads to higher leakages and global emissions than the standard. The standard also implies a better trade balance for the home country than the tax.

Suggested Citation

  • Paolo Giorgio Garella & Maria Teresa Trentinaglia, 2019. "Carbon Tax, Emission Standards, and Carbon Leak Under Price Competition," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 72(4), pages 941-964, April.
    • Handle: RePEc:kap:enreec:v:72:y:2019:i:4:d:10.1007_s10640-018-0234-z
    DOI: 10.1007/s10640-018-0234-z
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    2. Thomas Eichner & Rüdiger Pethig, 2021. "Unilateral Phase-Out of Coal to Power in an Emissions Trading Scheme," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 80(2), pages 379-407, October.

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