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We study various scenarios for taxing emissions of carbon dioxide (CO 2 ). The question is how carbon tax policies will perform, given international trade, if countries adopt different tax rates. We investigate this question quantitatively using CIM-EARTH, a newly developed open-source computable general equilibrium (CGE) model.Since climate change is a function of global CO 2 emissions, an efficient strategy for controlling emissions would be to impose the same price wherever they occur. Such an approach presents a free riding problem, however, because nations have an incentive not to comply while gaining the benefits of reduced emissions elsewhere. Moreover, because of distributive concerns and claims about responsibility for past emissions, many developing nations will be reluctant to impose emissions prices at the same level as developed nations.If some nations opt out, it will be more costly for those imposing a tax or other price on emissions to attain any goal of reduced global emissions. International trade accentuates the problem because nontaxing nations will likely increase emissions, a phenomenon known as carbon leakage. Carbon leakage will also be central to debates surrounding passage of a carbon pricing regime because politicians worry about production (and the resulting jobs) in their regions shifting to other parts of the world. One policy response is to impose a tax on the import of carbon intensive goods, with a rebate for exports so that domestic producers are not at a disadvantage (in either domestic or foreign markets) relative to producers in countries that do not have a carbon price. 1 The issue of carbon leakage has generated significant discussion, and studies have produced a wide range of leakage projections. 2 We contribute to this literature with a simple analysis of the underlying economics and a quantitative analysis employing CIM-EARTH. A complete presentation of results is available in our background paper, Joshua Elliott et al. (2010).

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