Taxing the carbon content of consumed goods

This note is concerned by the difference between production-based taxation and consumption-based taxation of CO2 emissions. We focus on the possible discrepancy between a carbon tax paid by the producer and a tax on the carbon content of the consumed good. We want to appraise if and how incentives from consumption-based taxation are pushed down the production chain. Depending on whether the producer takes as fixed the price he receives or the price paid by the consumer (price the producer receives plus the tax on carbon content), we have two different conclusions. This raises a puzzle: which price should be considered as fixed? We show that, if producers are rational, they should take the price paid by the consumer as given, not the price received by the producer. In this case, the tax on carbon content (consumption-based taxation) is equivalent to the standard carbon tax (production-based taxation). Our analysis stresses the importance of the producer's rationality, as well as the importance of differentiating taxation by the actual carbon content, specific to each producer.