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Optimal energy taxes and subsidies under a cost-effective unilateral climate policy: Addressing carbon leakage

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  • Kruse-Andersen, Peter Kjær
  • Sørensen, Peter Birch

Abstract

We analyse how a country pursuing a unilateral climate policy may contribute to a reduction in global CO2 emissions in a cost-effective way. To do so its system of energy taxes and subsidies must account for leakage of emissions from the domestic to the foreign economy. We focus on leakage occurring via international trade in electricity and via shifts between domestic and foreign production of other goods. The optimal tax-subsidy scheme is based on an intuitive principle: Impose a uniform carbon tax on all additions to global emissions caused by changes in domestic production and consumption of energy, including additions to emissions occurring via shifts in international trade. Emissions from the sector exposed to foreign competition should be taxed at reduced rates to avoid excessive carbon leakage, and a part of the carbon tax on electricity should be levied at the consumer rather than the producer level to ensure taxation of the carbon content of imported electricity. Producers of renewables-based electricity should receive a subsidy to internalize their contribution to the reduction of global emissions. In other sectors emissions should be taxed at a uniform rate corresponding to the marginal social cost of meeting the target for emissions reduction. Simulations calibrated to data for the Danish economy suggest that redesigning energy taxes and subsidies to account for carbon leakage can generate a welfare gain.

Suggested Citation

  • Kruse-Andersen, Peter Kjær & Sørensen, Peter Birch, 2022. "Optimal energy taxes and subsidies under a cost-effective unilateral climate policy: Addressing carbon leakage," Energy Economics, Elsevier, vol. 109(C).
  • Handle: RePEc:eee:eneeco:v:109:y:2022:i:c:s0140988322001062
    DOI: 10.1016/j.eneco.2022.105928
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    Cited by:

    1. Li, Xuelian & Zhou, Wei & Lo, Tang-Yun & Lin, Jyh-Horng, 2024. "International climate policy dilemmas: Examining effective carbon tariff and cap-and-trade regulation from a sustainable insurance perspective," Energy Economics, Elsevier, vol. 134(C).
    2. Peter K. Kruse-Andersen, 2022. "Climate Policy in the Shadow of National Security," Discussion Papers 22-01, University of Copenhagen. Department of Economics.
    3. Chen, Shi & Zhao, Yonghong & Huang, Fu-Wei & Wang, Bin & Lin, Jyh-Horng, 2024. "Carbon leakage perspective: Unveiling policy dilemmas in emission trading and carbon tariffs under insurer green finance," Energy Economics, Elsevier, vol. 130(C).
    4. Kruse-Andersen, Peter K., 2023. "Climate policy in the shadow of national security," Economics Letters, Elsevier, vol. 222(C).
    5. Gao, Zhiyuan & Zhang, Yahui & Li, Lianqing & Hao, Yu, 2024. "Will resource tax reform raise green total factor productivity levels in cities? Evidence from 114 resource-based cities in China," Resources Policy, Elsevier, vol. 88(C).
    6. Chen, Shi & Bai, Hanhan & Wang, Bin & Lin, Jyh-Horng, 2024. "Social enterprise, renewable energy, and cap-and-trade under sustainable insurance," Energy Economics, Elsevier, vol. 133(C).

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    More about this item

    Keywords

    Climate policy; Carbon leakage; Efficiency; Environmental taxes and subsidie; Border tax adjustment; Trade and environment; Electricity market;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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