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Carbon Tax, Emission Permits, and Carbon Leak under Price Competition

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  • Paolo GARELLA
  • Maria Teresa TRENTINAGLIA DE DAVERIO

Abstract

Carbon tax policies in a country are often criticized as leading to production shifting to other countries ("carbon leak"). We analyze here the different impact on carbon leaks of a carbon tax and of an emission permits policy enacted by one country (the "home" country) in a two country model of price competition. We also find the effects on the trade balance on the home country to differ in size though not in sign under the two policies. A carbon tax leads to higher carbon leaks than a permits policy. The trade balance effect ranks according to the degree of substitutability between the domestic and foreign good.

Suggested Citation

  • Paolo GARELLA & Maria Teresa TRENTINAGLIA DE DAVERIO, 2015. "Carbon Tax, Emission Permits, and Carbon Leak under Price Competition," Departmental Working Papers 2015-06, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
  • Handle: RePEc:mil:wpdepa:2015-06
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    References listed on IDEAS

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    More about this item

    Keywords

    Carbon Leakage; Carbon Tax; Emission Permits; Trade Balance; Price Competition;
    All these keywords.

    JEL classification:

    • L - Industrial Organization
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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