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Carbon taxes around the world: cooperation, strategic interactions, and spillovers

Author

Listed:
  • Alessandro Moro

    (Bank of Italy)

  • Valerio Nispi Landi

    (Bank of Italy)

Abstract

We examine the global implications of carbon taxation using a two-country environmental DSGE model, with a specific focus on the strategic interactions between countries, the case for cooperation, and the impact on the balance of payments. From a normative perspective, we show that, assuming a convex disutility of pollution, carbon taxes are strategic substitutes across countries: when one country increases carbon taxation, the other country finds it optimal to reduce it. From a positive perspective, a country imposing unilateral carbon taxation experiences a reduction in its production, a decrease in its interest rates, a depreciation of its currency on impact and an appreciation thereafter, higher debt, and equity outflows to the rest of the world.

Suggested Citation

  • Alessandro Moro & Valerio Nispi Landi, 2024. "Carbon taxes around the world: cooperation, strategic interactions, and spillovers," Temi di discussione (Economic working papers) 1445, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1445_24
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2024/2024-1445/en_tema_1445.pdf
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    References listed on IDEAS

    as
    1. Ferrari, Alessandro & Landi, Valerio Nispi, 2022. "Will the green transition be inflationary? Expectations matter," Working Paper Series 2726, European Central Bank.
    2. Fatica, Serena & Panzica, Roberto & Rancan, Michela, 2021. "The pricing of green bonds: Are financial institutions special?," Journal of Financial Stability, Elsevier, vol. 54(C).
    3. Garth Heutel, 2012. "How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 244-264, April.
    4. Lionel Fontagné & Katheline Schubert, 2023. "The Economics of Border Carbon Adjustment: Rationale and Impacts of Compensating for Carbon at the Border," Annual Review of Economics, Annual Reviews, vol. 15(1), pages 389-424, September.
    5. Mr. Tobias Adrian & Christopher J. Erceg & Marcin Kolasa & Jesper Lindé & Pawel Zabczyk, 2021. "A Quantitative Microfounded Model for the Integrated Policy Framework," IMF Working Papers 2021/292, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    carbon tax; climate change; capital flows; international policy transmission; DSGE;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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