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Negative Leakage

Author

Listed:
  • Kathy Baylis
  • Don Fullerton
  • Daniel H. Karney

Abstract

Our analytical general equilibrium model solves for effects of a small increase in carbon tax on leakage--the increase in emissions elsewhere. Identical consumers buy two goods using income from endowments that are mobile between sectors. Usually an increase in one sector's tax raises output price, so consumption shifts to the other good, causing positive leakage. Here, we find a new negative effect not recognized in existing literature: the taxed sector substitutes away from carbon into clean inputs, so it may absorb resources, shrink the other sector, and reduce their emissions. This "abatement resource effect" could offset some or all of the positive effect. We show that this effect can substantially affect estimates of leakage and is robust to model extensions.

Suggested Citation

  • Kathy Baylis & Don Fullerton & Daniel H. Karney, 2014. "Negative Leakage," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 1(1), pages 51-73.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/676449
    DOI: 10.1086/676449
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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • 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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