Working Paper: NBER ID: w18897
Authors: Joshua Elliott; Don Fullerton
Abstract: One country that tries to reduce greenhouse gas emissions may fear that other countries get a competitive advantage and increase emissions ("leakage"). Estimates from computable general equilibrium (CGE) models such as Elliott et al (2010a,b) indicate that 15% to 25% of abatement might be offset by leakage. Yet the Fullerton et al (2012) analytical general equilibrium model shows an offsetting term with negative leakage. To derive analytical expressions, their model is quite simple, with only one good from each country or sector, a fixed stock of capital, competitive markets, and many identical consumers that purchase both goods. Their model is not intended to be realistic, but only to demonstrate the potential for negative leakage. \n\nMost CGE models do not allow for negative leakage. In this paper, we use a full CGE model with many countries and many goods to measure effects in a way that allows for negative leakage. We vary elasticities of substitution and confirm the analytical model's prediction that negative leakage depends on the ability of consumers to substitute into the untaxed good and the ability of firms to substitute from carbon emissions into labor or capital.
Keywords: Carbon Tax; Emissions Leakage; CGE Models
JEL Codes: H23; Q56; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unilateral carbon tax (H23) | emissions leakage (F64) |
| elasticities of substitution (D11) | emissions leakage (F64) |
| unilateral carbon tax (H23) | terms of trade effect (F14) |
| unilateral carbon tax (H23) | fuel price effect (R48) |
| terms of trade effect (F14) | emissions increase (O44) |
| fuel price effect (R48) | consumption increase elsewhere (E20) |
| reallocation of labor and capital (F16) | decrease in overall emissions (F64) |
| abatement resource effect (Q52) | decrease in total emissions (Q52) |