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Global carbon price asymmetry

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  • Ritz, R.

Abstract

This paper studies a social planner who chooses countries' carbon prices so as to maximize global welfare. Product markets are characterized by firm heterogeneity, market power, and international trade. Because of the market-power distortion, the planner's optimal policy is second-best. The main insight is that optimal carbon prices may be highly asymmetric: zero in some countries and above the social cost of carbon in countries with relatively dirty production. This result obtains even though a uniform global carbon price is always successful at reducing countries' emissions. Competition policy that mitigates market power may enable stronger and more balanced climate action.

Suggested Citation

  • Ritz, R., 2021. "Global carbon price asymmetry," Cambridge Working Papers in Economics 2145, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2145
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    References listed on IDEAS

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    1. Eva Lyubich & Joseph S. Shapiro & Reed Walker, 2018. "Regulating Mismeasured Pollution: Implications of Firm Heterogeneity for Environmental Policy," Working Papers 18-03, Center for Economic Studies, U.S. Census Bureau.
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    Cited by:

    1. Hiroyuki Nishiyama & Mizuki Tsuboi, 2024. "An employment double dividend and welfare in a North–South model of trade with or without international policy coordination," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 26(3), pages 591-612, July.
    2. Wang, Junbo & Ma, Zhenyu & Fan, Xiayang, 2023. "We are all in the same boat: The welfare and carbon abatement effects of the EU carbon border adjustment mechanism," MPRA Paper 118978, University Library of Munich, Germany.
    3. Fan, Jing-Li & Li, Zezheng & Ding, Zixia & Li, Kai & Zhang, Xian, 2023. "Investment decisions on carbon capture utilization and storage retrofit of Chinese coal-fired power plants based on real option and source-sink matching models," Energy Economics, Elsevier, vol. 126(C).
    4. Shiyi Wu & Rui Niu, 2024. "Development of carbon finance in China based on the hybrid MCDM method," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-11, December.
    5. Li, Yangfan & Zhang, Xiaoyun, 2023. "Recycling scheme of carbon pricing for inclusive decarbonization and energy transition: A recursive computable general equilibrium analysis in China," Renewable Energy, Elsevier, vol. 217(C).

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    More about this item

    Keywords

    Carbon leakage; carbon pricing; imperfect competition; international trade; second best;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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