Carbon Tax and Border Tax Adjustments with Technology and Location Choices

Author Name Haitao CHENG (Hitotsubashi University) / ISHIKAWA Jota (Faculty Fellow, RIETI)
Creation Date/NO. April 2021 21-E-030
Research Project Economic Policy Issues in the Global Economy
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We develop a simple international duopoly model to analyze unilateral taxes on greenhouse-gas emissions and border tax adjustments (BTAs) where firms can abate emissions by adopting a clean technology. We specifically explore three policy regimes: i) carbon taxes alone (no BTAs); ii) carbon taxes accompanied by carbon-content tariffs (partial BTAs); and iii) carbon taxes coupled with emission-tax refunds for exports and carbon-content tariffs (full BTAs). We find that carbon taxes are not effective in decreasing global emissions in certain circumstances. Interestingly, an increase in the carbon tax rate can increase global emissions. High tax rates may discourage the adoption of a clean technology. When firm locations are fixed, full BTAs eliminate cross-border carbon leakage. However, partial BTAs can be more effective in reducing global emissions than full BTAs. When firm locations are endogenous, firms tend to produce in foreign countries to avoid the home carbon tax. BTAs discourage production in foreign countries. This effect is stronger with full BTAs than with partial BTAs.