Targeted carbon tariffs: Export response, leakage and welfare

Climate benefits of unilateral carbon policies are undermined by carbon leakage. To counteract leakage and increase global cost-effectiveness carbon tariffs can be imposed on the emissions embodied in imports from non-regulating regions. We present a stylized model analysis on the economic incentives for emissions abatement of producers subjected to carbon tariffs. The impacts of different carbon tariff designs are, then, quantified by an empirically based multi-sector, multi-region computable general equilibrium model of the global economy. We find that firm-targeted tariffs can deliver considerably stronger leakage reduction and higher gains in global cost-effectiveness than tariff designs operated at the industry level. Moreover, because the exporters are able to reduce their carbon tariffs by adjusting emissions, their competitiveness and the overall welfare of their economies will be less adversely affected than in the case of industry-level carbon tariff regimes.