Optimal energy taxes and subsidies under a cost-effective unilateral climate policy: Addressing carbon leakage

We analyse how a country pursuing unilateral climate policy may contribute to reduction in global CO 2 emissions cost-effective way. To do so its system of energy taxes and subsidies must account for leakage from the domestic foreign economy. focus on occurring via international trade electricity shifts between production other goods. The optimal tax-subsidy scheme is based an intuitive principle: Impose uniform carbon tax all additions caused by changes consumption energy, including trade. Emissions sector exposed competition should be taxed at reduced rates avoid excessive leakage, part levied consumer rather than producer level ensure taxation content imported electricity. Producers renewables-based receive subsidy internalize their contribution emissions. In sectors rate corresponding marginal social cost meeting target reduction. Simulations calibrated data Danish economy suggest that redesigning can generate welfare gain. • A emission motivates substantial deviations taxation. proposed ensures efficient regulation without using border adjustments. involves taxation, renewable various taxes. Consumption include final tradable goods, electricity, intermediate leakage-adjusted differs notably current regulation.