Unilateral climate policy and optimal containment in an open economy

In the absence of a broad international agreement, national climate policies NEWLINE are less efficient, due to carbon leakage, and more costly, due to causing NEWLINE unemployment and a loss of competitiveness on international markets. As, NEWLINE in many countries, a substantial fraction of emissions results from the production NEWLINE of intermediate goods, such as electricity or transportation services, NEWLINE we investigate whether the above negative side-effects can be addressed by NEWLINE a policy mix that (partially) contains the effects of climate policy to the intermediate NEWLINE goods sector. We use a four-sector general equilibrium model to NEWLINE study a policy mix that consists of taxing emissions and subsidizing the intermediate NEWLINE good. We show that such containment is a second-best approach NEWLINE to combat carbon leakage and to maintain a favorable international market NEWLINE position. Also, it can help to reduce climate-policy-induced unemployment.