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The effect of carbon taxation on cross-border competition and energy efficiency investments

Author

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  • Dorsey-Palmateer, Reid
  • Niu, Ben

Abstract

Carbon taxes increase costs for energy-consuming firms and can impact firms‘ ability to compete with other firms located in regions without that tax. This paper considers the effect of asymmetric carbon taxation when firms are able to adjust their energy efficiency investment levels to reflect the presence of the tax. Using a dynamic model of firm competition, we find that allowing firms to adjust their energy efficiency levels in response to a carbon tax could potentially allow firms to significantly mitigate the competition effects of that carbon tax. In our baseline parameterization, additional energy efficiency investments non-trivially mitigates profit loss for the firm facing the carbon tax as well as spurring adding energy efficiency investments in the non-taxing jurisdiction, thus reducing carbon leakage. This increase in energy efficiency can potentially reduce total energy usage by the firm in the taxing jurisdiction by more than the carbon tax alone. While the quantitative impact of energy efficiency investments on firm competitiveness depends on the nature of the industry, from a policy standpoint, the ability of energy efficiency investments to mitigate cross-border emissions leakage and negative competition effects without policy interventions such as a carbon border tax softens these two common criticisms of unilateral regional carbon taxes.

Suggested Citation

  • Dorsey-Palmateer, Reid & Niu, Ben, 2020. "The effect of carbon taxation on cross-border competition and energy efficiency investments," Energy Economics, Elsevier, vol. 85(C).
  • Handle: RePEc:eee:eneeco:v:85:y:2020:i:c:s0140988319303974
    DOI: 10.1016/j.eneco.2019.104602
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    Citations

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    Cited by:

    1. Katircioglu, Setareh & Katircioglu, Salih, 2023. "The effects of environmental taxation on stock returns of renewable energy producers: Evidence from Turkey," Renewable Energy, Elsevier, vol. 208(C), pages 311-323.
    2. Guoyong Wu & Mengmin Sun & Yanchao Feng, 2024. "How does the new environmental protection law affect the environmental social responsibility of enterprises in Chinese heavily polluting industries?," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-14, December.
    3. Radosław Wolniak & Sebastian Saniuk & Sandra Grabowska & Bożena Gajdzik, 2020. "Identification of Energy Efficiency Trends in the Context of the Development of Industry 4.0 Using the Polish Steel Sector as an Example," Energies, MDPI, vol. 13(11), pages 1-16, June.
    4. Mingzhe Yu & Qiang Zhou & Mui Yee Cheok & Jakub Kubiczek & Nadeem Iqbal, 2022. "Does green finance improve energy efficiency? New evidence from developing and developed economies," Economic Change and Restructuring, Springer, vol. 55(1), pages 485-509, February.
    5. Gourene, Grakolet & Hamouda, Samia Mansour & Brixiova, Zuzana, 2024. "Trend in Energy Intensity and Carbon Performance in North Africa," IZA Discussion Papers 16854, Institute of Labor Economics (IZA).
    6. Jia, Zhijie & Lin, Boqiang, 2020. "Rethinking the choice of carbon tax and carbon trading in China," Technological Forecasting and Social Change, Elsevier, vol. 159(C).
    7. Jing Wang & Yubing Xu, 2022. "How Does Digitalization Affect Haze Pollution? The Mediating Role of Energy Consumption," IJERPH, MDPI, vol. 19(18), pages 1-15, September.
    8. Fuqiang Dai & Hao Liu & Xia Zhang & Qing Li, 2022. "Does the Equalization of Public Services Effect Regional Disparities in the Ratio of Investment to Consumption? Evidence From Provincial Level in China," SAGE Open, , vol. 12(1), pages 21582440221, March.

    More about this item

    Keywords

    Energy efficiency; Carbon leakage; Carbon pricing; Cross-border;
    All these keywords.

    JEL classification:

    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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