Optimal Emission Pricing in the Presence of International Spillovers: Decomposing Leakage and Terms-of-Trade Motives

by Christoph Böhringer, Andreas Lange and Thomas F. Rutherford

- Carbon control policies in OECD countries commonly differentiate emission prices in favor of energy-intensive industries. While leakage provides a efficiency argument for differential emission pricing, the latter may be a disguised beggar-thy-neighbor policy to exploit terms of trade. Using an optimal tax framework, we propose a method to decompose the leakage motive and the terms-of-trade motive for emission price differentiation. We illustrate our method with a quantitative impact assessment of unilateral climate policies for the U.S. and EU economies.

Böhringer, C., A. Lange and T.F. Rutherford (2010). "Optimal Emission Pricing in the Presence of International Spillovers: Decomposing Leakage and Terms-of-Trade Motives." NBER Working Paper No. 15899, Apr 2010.