Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/207311
Authors: 
Kruse-Andersen, Peter Kjær
Sørensen, Peter Birch
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper 7920
Abstract: 
We analyze 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.
Subjects: 
optimal unilateral climate policy
carbon leakage
optimal energy taxes and subsidies
JEL: 
H21
H23
Q48
Q54
Document Type: 
Working Paper

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