Papers Archive

Policy makers in the EU and elsewhere are concerned that unilateral pricing of the carbon externality induces carbon leakage through relocation of emission-intensive and trade-exposed production to other regions. A common measure to mitigate such leakage is to combine an emission trading system with output-based allocation (OBA) of allowances where the latter works as an implicit production subsidy to regulated industries. We show analytically that it is optimal to impose in addition a consumption tax on the OBA goods (i.e., goods that are entitled to OBA) at a rate which is equivalent in value to the OBA subsidy rate. The explanation is that the consumption tax alleviates excessive consumption of the OBA goods, which is a distortionary effect of introducing output-based allocation. Using a multi-region multi-sector computable general equilibrium model calibrated to empirical data, we quantify the welfare gains for the EU of imposing such a consumption tax on top of its existing emission trading system with OBA. We run Monte Carlo simulations to account for uncertain leakage exposure of goods entitled to OBA. The consumption tax increases welfare whether the goods are highly exposed to leakage or not, and hence can be regarded as smart hedging against carbon leakage.

We study the link between temperature and economic development at the sub-national level, employing cross-sectional data from two distinct sources. In contrast to the existing cross-country literature on the temperature-income relationship, our setting allows for the inclusion of country fixed effects. Once accounting for country fixed effects, we do not find a statistically robust relationship between regional temperature and three different measures of regional economic development (per capita GDP, nightlights and gross cell production). We also test whether temperature is non-linearly related to regional income (with hotter regions being potentially particularly prone to adverse effects of temperature on income) but find no systematic evidence in favor of such a relationship. Finally, we examine whether the effect of temperature on economic development is especially pronounced in poorer regions (e.g., due to weaker adaptation). Again, there is no statistically robust evidence for such a link.