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How do developmental stages influence the effectiveness of carbon taxes and emissions trading systems?

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  • Im, Hyesu
  • Kim, Young-Han

Abstract

This paper examines whether carbon pricing—specifically carbon taxes and emissions trading systems (ETS)—effectively reduces carbon leakage, and how this varies by countries' development level and global value chain (GVC) position. Using Poisson Pseudo Maximum Likelihood estimation on OECD data on sector-level embodied carbon trade and the Environmental Policy Stringency Index (EPSI), we compare the effectiveness of ETS and carbon taxes across 42 countries. We find that ETS is more effective in high-income economies with strong institutional frameworks, while carbon taxes work better in lower-income economies with weaker regulatory capacity. This contrast reflects the institutional demands of ETS, including market infrastructure and enforcement. Our findings suggest that developing countries may benefit from initially adopting carbon taxes and gradually transitioning to ETS as institutional capacity improves. By empirically comparing these instruments across contexts, this paper contributes to the literature on climate policy design under institutional heterogeneity and international trade integration.

Suggested Citation

  • Im, Hyesu & Kim, Young-Han, 2025. "How do developmental stages influence the effectiveness of carbon taxes and emissions trading systems?," Economic Analysis and Policy, Elsevier, vol. 88(C), pages 1433-1452.
    • Handle: RePEc:eee:ecanpo:v:88:y:2025:i:c:p:1433-1452
    DOI: 10.1016/j.eap.2025.10.033
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    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F18 - International Economics - - Trade - - - Trade and Environment
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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