Haitao Cheng, Jota Ishikawa, 16 September 2021

As a result of global warming, carbon taxes and emissions trading policies are in the spotlight. However, lack of cross-country coordination can cause carbon leakage and increases in emissions. This column analyses the effectiveness of carbon taxes and border tax adjustment policies in reducing emissions and shaping firms’ decisions on abatement investment and firm location. It shows that a higher carbon tax can sometimes lead to higher global emissions and discourage investment in clean technology. Likewise, border tax adjustments should be designed carefully to ensure lower emissions and compatibility with WTO rules. 

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