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Unilateral Carbon Taxation in the Global Economy: The Green Paradox and carbon leakage revisted

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  • Frederick van der Ploeg

Abstract

Unilateral, second-best carbon taxes are analysed in a two-period, two-country model with international trade in final goods, oil and bonds. The increase in oil demand and acceleration of global warming resulting from a future carbon tax are large if the price elasticities of oil demand are large and that of oil supply is small, but are attenuated by the fall in the world interest rate especially if intertemporal substitution is weak. Despite this Green Paradox effect, green welfare rises if the fall in oil exploration is strong enough. If the current carbon tax is too low, the second-best future carbon tax is set below the first best to mitigate adverse Green Paradox effects. Unilateral exceed first-best carbon taxes due to an import tariff component. The intertemporal terms of trade effects of the future carbon tax increase current and future tariffs and those of the current tax lower the current tariff. Unilateral taxes are time inconsistent. Finally, carbon leakage and globally altruistic and unilateral optimal carbon taxes if other oil importers do not price carbon are analysed in a three-country model of the global economy.

Suggested Citation

  • Frederick van der Ploeg, 2015. "Unilateral Carbon Taxation in the Global Economy: The Green Paradox and carbon leakage revisted," OxCarre Working Papers 157, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  • Handle: RePEc:oxf:oxcrwp:157
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    File URL: http://www.oxcarre.ox.ac.uk/images/stories/papers/ResearchPapers/OxCarreRP2015157.pdf
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    References listed on IDEAS

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    Cited by:

    1. Armon Rezai & Frederick Ploeg, 2017. "Second-Best Renewable Subsidies to De-carbonize the Economy: Commitment and the Green Paradox," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 66(3), pages 409-434, March.
    2. Waldemar Marz & Johannes Pfeiffer, 2015. "Petrodollar Recycling, Oil Monopoly, and Carbon Taxes," ifo Working Paper Series 204, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

    More about this item

    Keywords

    unilateral carbon taxes; intertemporal terms of trade; tax incidence; Green Paradox; carbon leakage; second best; global altruism; unburnt fossil fuel;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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