Trade and Carbon Taxes

Abstract

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).

Impacts of border carbon adjustments on China's sectoral emissions: Simulations with a dynamic computable general equilibrium model

“…To discuss the impacts of the BTAs on China's sectoral carbon emissions, three scenarios are developed under which carbon tariffs will be implemented at different rates, i.e., US dollars 20, 50 and 80 per ton carbon emissions (US$/tce), respectively, according to recent literatures (Peterson and Schleich, 2007;Elliott et al, 2010). In each case, the BTAs measure will be imposed since the year 2020.…”

“…On the other hand, some studies have concluded that BTAs would be ineffective either to increase domestic competitiveness or to improve global environment (Weber and 5 Peters, 2009;Dong and Whalley, 2009a,b;Elliott et al, 2010). For example, Lessmann et al (2009) suggested that the leakage avoiding effect of BTAs would be small.…”

Kyoto and the carbon footprint of nations

“…This paper provides the first econometric ex post analysis of the Kyoto Protocol, thereby complementing computable general equilibrium (CGE) analyses such as the one by Elliott et al (2010). For this purpose, it assembles a new panel database on the carbon footprint of nations.…”

Can a unilateral carbon tax reduce emissions elsewhere?

“…A third group at the University of Chicago built CIM-EARTH, used by Elliott et al (2010a) to simulate different levels of carbon tax in Annex B countries of the Kyoto Protocol. They find that the "increase in emissions by non-Annex B countries relative to the reduction by Annex B countries, the standard measure of carbon leakage, ranges from 15 percent at low tax rates to over 25 percent for the highest tax rate" (p. 468).…”

“…In their model, the two sectors might produce two different goods in a closed economy, or they might 1 CGE models and results reviewed below include those of Fischer and Fox (2010) and Böhringer, Carbone, and Rutherford (2011), as well as MIT's "Emissions Prediction and Policy Analysis" (EPPA) model used by Paltsev (2001), Babiker (2005), and Winchester et al (2011). In this paper, we use the "Community Integrated Model of Economic and Resource Trajectories for Humankind" (CIM-EARTH), a relatively new model of Elliott et al (2010aElliott et al ( , 2010b. represent two countries that each produces a unique good.…”