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Environmental and Resource Economics

, Volume 75, Issue 1, pp 151–181 | Cite as

Taxing Consumption to Mitigate Carbon Leakage

  • Kevin R. KaushalEmail author
  • Knut Einar Rosendahl
Article

Abstract

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.

Keywords

Carbon leakage Consumption tax Emission trading system Output-based allocation Unilateral policy 

JEL Classification

D61 F18 H23 Q54 

Notes

Acknowledgements

We are grateful to Halvor Briseid Storrøsten and two anonymous reviewers for careful comments and helpful suggestions to previous versions, and to participants at the Policy Instrument Design course in 2016 at University of Gothenburg. Valuable feedback on earlier draft from students and faculty in Energy and Resources Group (ERG) at University of California Berkeley are also highly appreciated. Valuable help with the WIOD dataset from Jan Schneider is also highly appreciated.

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Copyright information

© Springer Nature B.V. 2019

Authors and Affiliations

  1. 1.Research DepartmentStatistics NorwayOsloNorway
  2. 2.School of Economics and BusinessNorwegian University of Life SciencesÅsNorway

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