Optimal unilateral climate policy with carbon leakage at the extensive and the intensive margins

Peter K. Kruse-Andersen*, Peter Birch Sørensen

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

We derive the optimal unilateral climate policy for an open economy with a domestic emissions target and aversion to carbon leakage, distinguishing between leakage at the extensive margin, where domestic firms relocate to foreign countries, and leakage at the intensive margin, where domestic firms lose world market shares. Implementing the optimal allocation requires several instruments including a lump-sum location subsidy to counter leakage at the extensive margin. Simulations indicate substantial leakage at the extensive margin and a social welfare gain of around 0.3 percent of national income from our optimal leakage-adjusted tax-subsidy scheme compared to uniform carbon taxation.

Original languageEnglish
JournalScandinavian Journal of Economics
ISSN0347-0520
DOIs
Publication statusE-pub ahead of print - 2024

Bibliographical note

Publisher Copyright:
© 2024 The Author(s). The Scandinavian Journal of Economics published by John Wiley & Sons Ltd on behalf of Föreningen för utgivande av the SJE.

Keywords

  • Carbon leakage
  • climate policy
  • optimal carbon taxation
  • policy instruments
  • trade and the environment

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