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Optimal Emission Pricing in the Presence of International Spillovers: Decomposing Leakage and Terms-of-Trade Motives

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  • Christoph Böhringer
  • Andreas Lange
  • Thomas F. Rutherford

Abstract

Carbon control policies in OECD countries commonly differentiate emission prices in favor of energy-intensive industries. While leakage provides a efficiency argument for differential emission pricing, the latter may be a disguised beggar-thy-neighbor policy to exploit terms of trade. Using an optimal tax framework, we propose a method to decompose the leakage motive and the terms-of-trade motive for emission price differentiation. We illustrate our method with a quantitative impact assessment of unilateral climate policies for the U.S. and EU economies. We conclude in these instances that complex optimal emission price differentiation does not substantially reduce the overall economic costs of carbon abatement compared with a simple rule of uniform emission pricing.

Suggested Citation

  • Christoph Böhringer & Andreas Lange & Thomas F. Rutherford, 2010. "Optimal Emission Pricing in the Presence of International Spillovers: Decomposing Leakage and Terms-of-Trade Motives," NBER Working Papers 15899, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:15899
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    More about this item

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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