Global carbon price asymmetry

This paper studies a social planner who chooses countries’ carbon prices so as to maximize global welfare. Product markets are characterized by firm heterogeneity, market power, and international trade. Because of the market-power distortion, the planner’s optimal policy is second-best. The main ins...

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Bibliographic Details
Published in:Journal of environmental economics and management 2022-07, Vol.114, p.102687, Article 102687
Main Author: Ritz, Robert A.
Format: Article
Language:English
Subjects:
Carbon leakage
Carbon pricing
Imperfect competition
International trade
Second best
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Summary:This paper studies a social planner who chooses countries’ carbon prices so as to maximize global welfare. Product markets are characterized by firm heterogeneity, market power, and international trade. Because of the market-power distortion, the planner’s optimal policy is second-best. The main insight is that optimal carbon prices may be highly asymmetric: zero in some countries and above the social cost of carbon in countries with relatively dirty production. This result obtains even though a uniform global carbon price is always successful at reducing countries’ emissions. Competition policy that mitigates market power may enable stronger climate action.
ISSN:0095-0696
1096-0449
DOI:10.1016/j.jeem.2022.102687