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

  • Christoph Böhringer

    ()

    (University of Oldenburg, Department of Economics)

  • Andreas Lange

    (University of Hamburg, Department of Economics, Germany)

  • Thomas F. Rutherford

    (ETH Zürich, CEPE, Switzerland)

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.

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File URL: http://www.vwl.uni-oldenburg.de/download/V-347-12.pdf
File Function: First version, 2012
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Paper provided by University of Oldenburg, Department of Economics in its series Working Papers with number V-347-12.

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Length: 34 pages
Date of creation: Jun 2012
Date of revision: Jun 2012
Publication status: Published in Oldenburg Working Papers V-347-12
Handle: RePEc:old:dpaper:347
Contact details of provider: Postal: 26111 Oldenburg
Phone: +49 441 798-4107
Fax: +49 441 798-4116
Web page: http://www.vwl.uni-oldenburg.de/
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  1. Ringlund, Guro Bornes & Rosendahl, Knut Einar & Skjerpen, Terje, 2008. "Does oilrig activity react to oil price changes An empirical investigation," Energy Economics, Elsevier, vol. 30(2), pages 371-396, March.
  2. Krichene, Noureddine, 2002. "World crude oil and natural gas: a demand and supply model," Energy Economics, Elsevier, vol. 24(6), pages 557-576, November.
  3. Christoph Böhringer & Thomas Rutherford, 2002. "Carbon Abatement and International Spillovers," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 22(3), pages 391-417, July.
  4. Christoph Böhringer & Thomas F. Rutherford, 2010. "The Costs of Compliance: A CGE Assessment of Canada's Policy Options under the Kyoto Protocol," The World Economy, Wiley Blackwell, vol. 33(2), pages 177-211, 02.
  5. Markusen, James R., 1975. "International externalities and optimal tax structures," Journal of International Economics, Elsevier, vol. 5(1), pages 15-29, February.
  6. Krutilla, Kerry, 1991. "Environmental regulation in an open economy," Journal of Environmental Economics and Management, Elsevier, vol. 20(2), pages 127-142, March.
  7. Böhringer, Christoph & Rutherford, Thomas F. & Tol, Richard S. J., 2009. "The EU 20/20/2020 Targets: An Overview of the EMF22 Assessment," Papers WP325, Economic and Social Research Institute (ESRI).
  8. Hoel, Michael, 1994. "Should a Carbon Tax be Differentiated Across Sectors?," CEPR Discussion Papers 1066, C.E.P.R. Discussion Papers.
  9. Hoel, Michael, 1991. "Global environmental problems: The effects of unilateral actions taken by one country," Journal of Environmental Economics and Management, Elsevier, vol. 20(1), pages 55-70, January.
  10. Azusa OKAGAWA & Kanemi BAN, 2008. "Estimation of substitution elasticities for CGE models," Discussion Papers in Economics and Business 08-16, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  11. Graham, Paul & Thorpe, Sally & Hogan, Lindsay, 1999. "Non-competitive market behaviour in the international coking coal market," Energy Economics, Elsevier, vol. 21(3), pages 195-212, June.
  12. 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 S97-S110.
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