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American Economic Review: Vol. 103 No. 3 (May 2013)

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Leakage, Welfare, and Cost-Effectiveness of Carbon Policy

Article Citation

Baylis, Kathy, Don Fullerton, and Daniel H. Karney. 2013. "Leakage, Welfare, and Cost-Effectiveness of Carbon Policy." American Economic Review, 103(3): 332-37.

DOI: 10.1257/aer.103.3.332

Abstract

We extend the model of Fullerton, Karney, and Baylis (2012) to explore cost-effectiveness of unilateral climate policy in the presence of leakage. We ignore the welfare gain from reducing greenhouse gas emissions, and focus on the welfare cost of the emissions tax or permit scheme. Whereas that prior paper solves for changes in emissions quantities and finds that leakage may be negative, we show here that all cases with negative leakage in that model are cases where a unilateral carbon tax results in a welfare loss. With positive leakage, however, a unilateral policy can improve welfare.

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Authors

Baylis, Kathy (U IL)
Fullerton, Don (U IL)
Karney, Daniel H. (U IL)

JEL Classifications

Q54: Climate; Natural Disasters; Global Warming
Q58: Environmental Economics: Government Policy


American Economic Review


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