The efficiency effects of carbon pricing depend on how it impacts distortions in fossil fuel markets, most notably from local air pollution externalities. By offsetting these distortions, carbon pricing may generate significant net economic benefits, so it is in countries own interests to implement carbon pricing unilaterally rather than waiting for others to act. Net benefits are further enhanced if carbon pricing is revenue neutral and broader taxes cause substantial avoidance and evasion. Flexible international pricing regimes, allowing countries with high domestic environmental benefits or fiscal needs to set higher carbon prices, are more efficient than globally uniform carbon prices.
carbon pricing non-carbon externalities air pollution welfare effects international price floors fiscal linkages