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School of Economics and Business, Norwegian University of Life Sciences Working Paper Series, School of Economics and Business, Norwegian University of Life Sciences

No 05-2017:
Taxing consumption to mitigate carbon leakage

Kevin R. Kaushal () and Knut Einar Rosendahl ()

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 under certain conditions have welfare improving effects for the tax introducing country as well. 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; Output-based allocation; Consumption tax; (follow links to similar papers)

JEL-Codes: D61; F18; H23; Q54; (follow links to similar papers)

37 pages, September 21, 2017

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