Carbon Taxes and Global Emissions: An In-depth Analysis of Pollution Havens and Trade Openness

Today, I want to talk to you about a fascinating paper that I came across recently. It’s called “Pollution havens? Carbon taxes, globalization, and the geography of emissions” and it was written by two researchers from the European Central Bank. You can find the full paper here.

The paper explores a very important and timely question:

do carbon taxes work?

Carbon taxes are fees that governments charge on the production or consumption of fossil fuels, such as coal, oil, and gas. The idea is to make polluters pay for the environmental and social costs of their emissions and to encourage them to switch to cleaner and more efficient sources of energy. Carbon taxes are widely regarded as one of the most effective and efficient ways to reduce greenhouse gas emissions and fight climate change.

But there is a catch.

Carbon taxes only apply within the borders of the countries that impose them.

What if the polluters simply move their production to other countries that have no or lower carbon taxes?

This would mean that the global emissions would not decrease, but rather shift from one place to another. This phenomenon is known as carbon leakage, and it could undermine the effectiveness of carbon taxes and create unfair competition for the countries that adopt them.

The paper investigates this issue using a large panel dataset of 57 countries, covering 91% of global emissions, over the period 1991-2018.

The paper compares the effects of carbon taxes on two different measures of emissions:

• territorial emissions, which are the emissions that occur within a country’s borders, and
• consumption emissions, which are the emissions that occur anywhere in the world to satisfy a country’s demand for goods and services.

The difference between these two measures reflects the net emissions that a country imports or exports through international trade.

So, what are the main findings of the paper? Here are the key takeaways:

• Carbon taxes reduce territorial emissions over time but have no significant effect on consumption emissions. This means that carbon taxes lower the emissions that occur within a country’s borders, but not the emissions that occur outside of its borders to satisfy its demand. This suggests that carbon taxes lead to some degree of carbon leakage, as countries with carbon taxes may offset the reduction in territorial emissions by importing more emissions-intensive goods and services from other countries.
• The effect of carbon taxes on emissions varies with trade openness. Countries that are more open to trade see a smaller reduction in territorial emissions and no reduction in consumption emissions, while countries that are less open to trade see a significant reduction in both territorial and consumption emissions. This implies that trade openness facilitates carbon leakage, as countries that are more open to trade can more easily shift the production of emissions to other countries.
• Carbon taxes lead to a modest increase in imports. The paper finds some evidence that carbon taxes increase the imports of goods and services, especially for countries that are more open to trade. This is consistent with the idea that carbon taxes create a negative carbon externality at the global level, as countries with carbon taxes may increase their demand for emissions-intensive goods and services produced in other countries.

The paper concludes that national carbon taxes have limited effects on global emissions and that international cooperation and coordination are needed to ensure the safety and benefits of carbon taxation. The paper suggests some possible ways to achieve this, such as creating climate clubs, imposing carbon border adjustments, or setting a global price on carbon.

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Disclaimer: The views expressed in this blog are not necessarily those of the blog writer and his affiliations and are for informational purposes only.

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