Carbon Tariffs: An Analysis of the Trade, Welfare and Emission Effects

Carbon tariffs are one prominently discussed climate policy. The proponents stress the carbon tariffs’ ability to restore competitiveness, avoid carbon leakage, and reduce world carbon emissions. We analyze the effects of carbon tariffs on trade, welfare, and carbon emissions in a structural gravity model. We find that the introduction of carbon tariffs reduces welfare in most countries and the effect tends to be most pronounced in developing countries. Further, carbon emissions are massively shifted from these countries to industrialized countries and world carbon emissions decrease by 0.83 percent, with a bootstrapped 95% confidence interval of [-0.92, -0.80]. In our two-sector, two-factor gravity model, we are able to decompose the emission changes into scale, composition, and technique effects. While for individual countries composition accounts for 73 percent of the change on average, two thirds of the world reduction are due to the world scale effect.