Cooperative and non-cooperative solutions to carbon leakage

In this paper we develop a modified version of the computable general equilibrium GTAP-E model in order to assess potential economic and carbon emissions effects related to alternative policy measures implemented with the aim of reducing carbon leakage. We compare two approaches to dealing with carbon leakage: a cooperative solution, where all countries cooperate to achieve Kyoto targets without carbon leakage through a global carbon market, and a non-cooperative solution, where Annex I countries introduce carbon tariffs in order to solve the carbon leakage problem unilaterally. Alternative carbon tariff hypotheses are compared. On the one hand, carbon tariffs could be exogenously determined according to the domestic carbon tax level applied by Annex I countries. On the other hand, carbon tariffs could be endogenously computed according to alternative policy goals: CO2 emissions abatement targets for Non-Annex I countries or maintaining the international competitiveness of Annex I countries‟ firms. Results provide evidence on the scarce effectiveness of carbon tariffs both in reducing carbon leakage and enhancing economic competitiveness. On the contrary, these tariffs seem to have potentially large negative welfare effects not only on the Non-Annex countries, but also on some Annex I countries.