Second-Best Carbon Taxation in the Global Economy: The Green Paradox and Carbon Leakage Revisited

40 Pages Posted: 20 Apr 2015

Date Written: April 2015

Abstract

Unilateral second-best carbon taxes are analysed in a two-period, two-country model with international trade in final goods, oil and bonds. Acceleration of global warming resulting from a future carbon tax is large if the price elasticities of oil demand are large and that of oil supply is small. The fall in the world interest rate weakens this weak Green Paradox effect, especially if intertemporal substitution is weak. Still, green welfare rises if the fall in oil supply and cumulative emissions is strong enough. If the current carbon tax is too low, the second-best future carbon tax is set below the first best to mitigate adverse Green Paradox effects. Unilateral second-best optimal carbon taxes exceed the first-best taxes due to an import tariff component. The intertemporal terms of trade effects of the future carbon tax increase current and future tariffs and those of the current tax lower the current tariff. Finally, carbon leakage and globally altruistic and unilateral second-best optimal carbon taxes if non-Kyoto oil importers do not price carbon or price it too low are analysed in a three-country model of the global economy.

Keywords: asset tax, carbon leakage, global altruism, Green Paradox, intertemporal terms of trade, second best, tax incidence, unburnt fossil fuel, unilateral carbon taxes

JEL Classification: D62, D90, H22, H23, Q31, Q38, Q54

Suggested Citation

van der Ploeg, Frederick, Second-Best Carbon Taxation in the Global Economy: The Green Paradox and Carbon Leakage Revisited (April 2015). CEPR Discussion Paper No. DP10549, Available at SSRN: https://ssrn.com/abstract=2596629

Frederick Van der Ploeg (Contact Author)

University of Oxford ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

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