TY - JOUR

T1 - Optimal energy taxes and subsidies under a cost-effective unilateral climate policy

T2 - Addressing carbon leakage

AU - Kruse-Andersen, Peter Kjær

AU - Sørensen, Peter Birch

PY - 2022

Y1 - 2022

N2 - We analyse 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.

AB - We analyse 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.

KW - Faculty of Social Sciences

KW - carbon leakage

KW - carbon taxes

KW - subsidies to renewable energy

KW - climate policy

KW - Border carbon adjustments

KW - Electricity market

KW - Trade and environment

KW - climate policy

KW - carbon leakage

KW - efficiency

KW - environmental taxes and subsidie

KW - Trade and environment

KW - Electricity market

U2 - 10.1016/j.eneco.2022.105928

DO - 10.1016/j.eneco.2022.105928

M3 - Journal article

VL - 109

JO - Energy Economics

JF - Energy Economics

SN - 0140-9883

M1 - 105928

ER -