Working Paper: CEPR ID: DP17714
Authors: Bruno Conte; Klaus Desmet; Esteban Rossi-Hansberg
Abstract: A unilateral carbon tax trades off the distortionary costs of taxation and the future gains from slowing down global warming. Because the cost is local and immediate, whereas the benefit is global and delayed, this tradeoff tends to be unfavorable to unilateral carbon taxes. We show that this logic breaks down in a world with trade and migration where economic geography is shaped by agglomeration economies and congestion forces. Using a multisector dynamic spatial integrated assessment model (S-IAM), this paper predicts that a carbon tax introduced by the European Union (EU) and rebated locally can, if not too large, increase the size of Europe’s economy by concentrating economic activity in its high-productivity non-agricultural core and by incentivizing immigration to the EU. The resulting change in the spatial distribution of economic activity improves global efficiency and welfare. A unilateral carbon tax with local rebating introduced by the US generates similar global welfare gains. Other forms of rebating can dilute or revert this positive effect.
Keywords: carbon tax; economic geography; global warming; welfare; agglomeration economies
JEL Codes: F18; H23; O13; O44; Q56; R11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Carbon tax implemented by the EU (Q58) | Increase in the size of the EU economy (O52) |
| Local rebating of carbon tax revenues (H23) | Increase in income in non-agricultural sectors (O49) |
| Increase in income in non-agricultural sectors (O49) | Migration from agricultural to non-agricultural regions (R23) |
| Migration from agricultural to non-agricultural regions (R23) | Improved efficiency of spatial distribution (R12) |
| Carbon tax implemented by the EU (Q58) | Global welfare gains (D69) |
| Carbon tax in the US (H23) | Comparable global welfare gains (D69) |
| Carbon tax exceeding certain thresholds (H23) | Contraction of the EU economy (O52) |
| Carbon tax exceeding certain thresholds (H23) | Global welfare gains may still persist (F62) |