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The Strategic Value of Carbon Tariffs

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  • Christoph Böhringer

    ()
    (Carl von Ossietzky Universität Oldenburg, Institut für Volkswirtschaftslehre & ZenTra)

  • Jared C. Carbone

    ()
    (University of Calgary and Resources for the Future, Department of Economics)

  • Thomas F. Rutherford

    ()
    (University of Wisconsin, Madison)

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.

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File URL: http://papers.ssrn.com/abstract=2375815
File Function: First version, 2013
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Bibliographic Info

Paper provided by ZenTra - Center for Transnational Studies in its series ZenTra Working Papers in Transnational Studies with number 26 / 2014.

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Length: 41 pages
Date of creation: Oct 2013
Date of revision: Jan 2014
Handle: RePEc:zen:wpaper:26

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

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  1. Christoph Böhringer & Jared C. Carbone & Thomas F. Rutherford, 2013. "Embodied Carbon Tariffs," ZenTra Working Papers in Transnational Studies, ZenTra - Center for Transnational Studies 25 / 2014, ZenTra - Center for Transnational Studies, revised Jan 2014.
  2. Graham, Paul & Thorpe, Sally & Hogan, Lindsay, 1999. "Non-competitive market behaviour in the international coking coal market," Energy Economics, Elsevier, Elsevier, vol. 21(3), pages 195-212, June.
  3. Mustafa H. Babiker & Thomas F. Rutherford, 2005. "The Economic Effects of Border Measures in Subglobal Climate Agreements," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 4), pages 99-126.
  4. Warwick J. McKibbin & Peter J. Wilcoxen, 1997. "A Better Way to Slow Global Climate Change," Economics and Environment Network Working Papers, Australian National University, Economics and Environment Network 9702, Australian National University, Economics and Environment Network.
  5. Krichene, Noureddine, 2002. "World crude oil and natural gas: a demand and supply model," Energy Economics, Elsevier, Elsevier, vol. 24(6), pages 557-576, November.
  6. Mattoo, Aaditya & Subramanian, Arvind & van der Mensbrugghe, Dominique & He, Jianwu, 2009. "Reconciling climate change and trade policy," Policy Research Working Paper Series 5123, The World Bank.
  7. Azusa OKAGAWA & Kanemi BAN, 2008. "Estimation of substitution elasticities for CGE models," Discussion Papers in Economics and Business 08-16, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  8. Markusen, James R., 1975. "International externalities and optimal tax structures," Journal of International Economics, Elsevier, vol. 5(1), pages 15-29, February.
  9. Bergstrom, Theodore & Blume, Lawrence & Varian, Hal, 1986. "On the private provision of public goods," Journal of Public Economics, Elsevier, vol. 29(1), pages 25-49, February.
  10. Hoel, Michael, 1991. "Global environmental problems: The effects of unilateral actions taken by one country," Journal of Environmental Economics and Management, Elsevier, vol. 20(1), pages 55-70, January.
  11. Christoph Bohringer & Jared Carbone & Thomas F. Rutherford, 2013. "Embodied Carbon Tariffs," Working Papers 2013-24, Department of Economics, University of Calgary, revised 11 Oct 2013.
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