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Second-best Carbon Taxation in the Global Economy: The Green Paradox and Carbon Leakage Revisited

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  • Frederick van der Ploeg

Abstract

Unilateral second-best carbon taxes are analysed in a two-period, two-country model with international trade in final goods, oil and bonds. Acceleration of global warming resulting from a future carbon tax is large if the price elasticities of oil demand are large and that of oil supply is small. The fall in the world interest rate weakens this weak Green Paradox effect, especially if intertemporal substitution is weak. Still, green welfare rises if the fall in oil supply and cumulative emissions is strong enough. If the current carbon tax is too low, the second-best future carbon tax is set below the first best to mitigate adverse Green Paradox effects. Unilateral second-best optimal carbon taxes exceed the first-best taxes due to an import tariff component. The intertemporal terms of trade effects of the future carbon tax increase current and future tariffs and those of the current tax lower the current tariff. Finally, carbon leakage and globally altruistic and unilateral second-best optimal carbon taxes if non-Kyoto oil importers do not price carbon or price it too low are analysed in a three-country model of the global economy.

Suggested Citation

  • Frederick van der Ploeg, 2015. "Second-best Carbon Taxation in the Global Economy: The Green Paradox and Carbon Leakage Revisited," CEEES Paper Series CE3S-04/15, European University at St. Petersburg, Department of Economics.
  • Handle: RePEc:eus:ce3swp:0415
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    2. Okullo, Samuel & Reynes, F. & Hofkes, M., 2016. "Biofuel Mandating and the Green Paradox," Discussion Paper 2016-024, Tilburg University, Center for Economic Research.
    3. Eichner, Thomas & Pethig, Rüdiger, 2017. "Trade in fossil fuel deposits for preservation and strategic action," Journal of Public Economics, Elsevier, vol. 147(C), pages 50-61.
    4. Gustav Engström & Johan Gars, 2016. "Climatic Tipping Points and Optimal Fossil-Fuel Use," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 65(3), pages 541-571, November.
    5. Corrado Di Maria & Sjak Smulders & Edwin Werf, 2017. "Climate Policy with Tied Hands: Optimal Resource Taxation Under Implementation Lags," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 66(3), pages 537-551, March.
    6. Armon Rezai & Frederick Ploeg, 2017. "Second-Best Renewable Subsidies to De-carbonize the Economy: Commitment and the Green Paradox," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 66(3), pages 409-434, March.
    7. Hassan Benchekroun & Gerard (G.C.) van der Meijden & Cees Withagen, 2017. "OPEC, Shale Oil, and Global Warming - On the importance of the order of extraction," Tinbergen Institute Discussion Papers 17-104/VIII, Tinbergen Institute.
    8. repec:eee:jeeman:v:89:y:2018:i:c:p:153-167 is not listed on IDEAS
    9. Coulomb, Renaud & Henriet, Fanny, 2018. "The Grey Paradox: How fossil-fuel owners can benefit from carbon taxation," Journal of Environmental Economics and Management, Elsevier, vol. 87(C), pages 206-223.
    10. Hassan Benchekroun & Gerard (G.C.) van der Meijden & Cees Withagen, 2017. "OPEC, Shale Oil, and Global Warming - On the importance of the order of extraction," Tinbergen Institute Discussion Papers 17-104/VIII, Tinbergen Institute.
    11. Dengler, Sebastian, 2017. "Economic essays on privacy, big data, and climate change," Other publications TiSEM 2e48fcbf-1584-416d-ae88-2, Tilburg University, School of Economics and Management.
    12. Waldemar Marz & Johannes Pfeiffer, 2015. "Petrodollar Recycling, Oil Monopoly, and Carbon Taxes," ifo Working Paper Series 204, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    13. Thomas Eichner & Gilbert Kollenbach & Mark Schopf, 2018. "Buying versus leasing fuel deposits for preservation," Volkswirtschaftliche Diskussionsbeiträge 186-18, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.

    More about this item

    Keywords

    unilateral carbon taxes; intertemporal terms of trade; tax incidence; Green Paradox; asset tax; carbon leakage; second best; global altruism; unburnt fossil fuel;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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