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

Author

Listed:
  • Christoph Böhringer

    () (University of Oldenburg, Department of Economics)

  • Andreas Lange

    (University of Hamburg, Department of Economics, Germany)

  • Thomas F. Rutherford

    (ETH Zürich, CEPE, Switzerland)

Abstract

Carbon leakage provides an efficiency argument for unilateral climate policy to differentiate emission prices in favor of emission-intensive and trade-exposed sectors. At the same time, differential emission pricing can be (mis-)used as a 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 employ our method for a quantitative impact assessment of unilateral climate policy based on empirical data. We find that the leakage motive yields only small efficiency gains compared to uniform emission pricing. Likewise, the terms-of-trade motive has rather limited potential for strategic burden shifting. We conclude that the simple first-best rule of uniform emission pricing remains a practical guideline for unilateral climate policy design.

Suggested Citation

  • Christoph Böhringer & Andreas Lange & Thomas F. Rutherford, 2012. "Optimal Emission Pricing in the Presence of International Spillovers: Decomposing Leakage and Terms-of-Trade Motives," Working Papers V-347-12, University of Oldenburg, Department of Economics, revised Jun 2012.
  • Handle: RePEc:old:dpaper:347
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    File URL: http://www.vwl.uni-oldenburg.de/download/V-347-12.pdf
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    References listed on IDEAS

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    1. Krichene, Noureddine, 2002. "World crude oil and natural gas: a demand and supply model," Energy Economics, Elsevier, vol. 24(6), pages 557-576, November.
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    3. Böhringer, Christoph & Balistreri, Edward J. & Rutherford, Thomas F., 2012. "The role of border carbon adjustment in unilateral climate policy: Overview of an Energy Modeling Forum study (EMF 29)," Energy Economics, Elsevier, vol. 34(S2), pages 97-110.
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    More about this item

    Keywords

    optimal taxation; emission leakage; terms of trade;

    JEL classification:

    • 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
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models

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