Working Paper: NBER ID: w17001
Authors: Don Fullerton; Daniel Karney; Kathy Baylis
Abstract: We build a simple analytical general equilibrium model and linearize it, to find a closed-from expression for the effect of a small change in carbon tax on leakage - the increase in emissions elsewhere. The model has two goods produced in two sectors or regions. Many identical consumers buy both goods using income from a fixed stock of capital that is mobile between sectors. An increase in one sector's carbon tax raises the price of its output, so consumption shifts to the other good, causing positive carbon leakage. However, the taxed sector substitutes away from carbon into capital. It thus absorbs capital, which shrinks the other sector, causing negative leakage. This latter effect could swamp the former, reducing carbon emissions in both sectors.
Keywords: No keywords provided
JEL Codes: H2; H23; Q48; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in carbon tax (H23) | Increase in price of taxed sector's output (H29) |
| Increase in price of taxed sector's output (H29) | Shift in consumption towards untaxed sector (H29) |
| Shift in consumption towards untaxed sector (H29) | Positive leakage (L15) |
| Increase in carbon tax (H23) | Taxed sector's substitution of carbon into capital (H23) |
| Taxed sector's substitution of carbon into capital (H23) | Absorption of capital from unregulated sector (O16) |
| Absorption of capital from unregulated sector (O16) | Shrinkage of unregulated sector (O17) |
| Shrinkage of unregulated sector (O17) | Negative leakage (D62) |
| Positive leakage (L15) | Net reduction in global carbon emissions (F64) |
| Negative leakage (D62) | Net reduction in global carbon emissions (F64) |
| Increase in carbon tax (H23) | Positive leakage and Negative leakage (D62) |