Taxing Consumption to Mitigate Carbon Leakage
Journal article, Peer reviewed
Accepted version
Date
2019Metadata
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Original version
Kaushal, K. R., & Rosendahl, K. E. (2020). Taxing Consumption to Mitigate Carbon Leakage. Environmental and Resource Economics, 75(1), 151-181 https://doi.org/10.1007/s10640-019-00392-1Abstract
Unilateral actions to reduce CO2 emissions could lead to carbon leakage such as relocation of emission-intensive and trade-exposed industries (EITE). To mitigate such leakage, countries often supplement an emissions trading system (ETS) with free allocation of allowances to exposed industries, e.g. in the form of output-based allocation (OBA). This paper examines the welfare effects of supplementing OBA with a consumption tax on EITE goods. In particular, we investigate the case when only a subset of countries involved in a joint ETS introduces such a tax. The analytical results suggest that the consumption tax would have unambiguously global welfare improving effects, and have welfare improving effects for the tax introducing country as well unless there are strong unfavorable terms-of-trade effects. Numerical simulations in the context of the EU ETS support the analytical findings, including that the consumption tax is welfare improving for the single country that implements the tax.
Description
This is a post-print version of an article published in Environmental and Resource Economics, made available in accordance with the copyright policy of the journal publisher. No commercial re-distribution or re-use is allowed. This version may contain minor differences from the journal’s pdf-version.