One country or sector that tries to reduce greenhouse gas emissions may fear that other countries or sectors will get a competitive advantage and increase emissions. Computable general equilibrium (CGE) models such as Elliott et al. (2010a, 2010b) indicate that 15–25% of abatement might be offset by this “leakage.” Yet the Fullerton et al. (2012) simple two-sector analytical general equilibrium model shows an offsetting term with negative leakage. In this paper, we use a full CGE model with many countries and many goods to measure effects in a way that allows for this negative leakage term. We vary elasticities of substitution and confirm the analytical model’s prediction that whether this negative leakage term offsets the positive leakage terms depends on the ability of consumers to substitute into the untaxed good relative to the ability of firms to substitute from carbon emissions into labor or capital.
Areas of Focus: Climate Change
, Climate Economics
Climate change is an urgent global challenge. EPIC research is helping to assess its impacts, quantify its costs, and identify an efficient set of policies to reduce emissions and adapt...
, Climate Law & Policy
Climate change will affect every sector of the economy, both locally and globally. EPIC research is quantifying these effects to help guide policymakers, businesses, and individuals working to mitigate and...
, Climate Science
Climate Law & Policy
As countries around the world implement policies to confront climate change, EPIC research is calculating which policies will have the most impact for the least cost.
EPIC’s interdisciplinary team of researchers is contributing to a cross-cutting body of knowledge on the scientific causes of climate change and its social consequences.