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Leakage, Welfare, and Cost-Effectiveness of Carbon Policy

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  • Kathy Baylis
  • Don Fullerton
  • Daniel H. Karney

Abstract

We extend the model of Fullerton, Karney, and Baylis (2012 working paper) to explore cost-effectiveness of unilateral climate policy in the presence of leakage. We ignore the welfare gain from reducing greenhouse gas emissions and focus on the welfare cost of the emissions tax or permit scheme. Whereas that prior paper solves for changes in emissions quantities and finds that leakage may be negative, we show here that all cases with negative leakage in that model are cases where a unilateral carbon tax results in a welfare loss. With positive leakage, however, a unilateral policy can improve welfare.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18898.

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Date of creation: Mar 2013
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Handle: RePEc:nbr:nberwo:18898

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  1. Gilbert Metcalf & David Weisbach, 2008. "The Design of a Carbon Tax," Discussion Papers Series, Department of Economics, Tufts University 0728, Department of Economics, Tufts University.
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