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Second-Best Carbon Taxation in the Global Economy: The Green Paradox and Carbon Leakage Revisited

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  • Rick Van der Ploeg

Abstract

Acceleration of global warming resulting from a future carbon tax is large if the price elasticities of oil demand are large and that of oil supply is small. The fall in the world interest rate weakens this weak Green Paradox effect, especially if intertemporal substitution is weak. Still, social damages from greenhouse gases drop if the fall in oil supply and cumulative emissions is strong enough. If the current carbon tax is set too low, the second-best future carbon tax is set below the first best too to mitigate adverse Green Paradox effects. Unilateral second-best optimal carbon taxes exceed the first-best 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. Finally, carbon leakage and globally altruistic and unilateral second-best optimal carbon taxes if non-Kyoto oil importers price carbon too low are analysed in a three-country model of the global economy.

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  • Rick Van der Ploeg, 2015. "Second-Best Carbon Taxation in the Global Economy: The Green Paradox and Carbon Leakage Revisited," 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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    More about this item

    Keywords

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

    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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