Conference Agenda

This paper compares the effects of differentiated carbon taxes with those of a global harmonized tax associated with revenue recycling. Using a global Integrated Assessment Model representing national economies, we find that a uniform global carbon tax with lump-sum per capita recycling is the most welfare enhancing and inequality reducing policy. It can bring a welfare improvement equivalent to several percents of average global consumption until 2050. This scheme however implies large international transfers between countries. A more modest scheme, where 5% of global carbon revenues are targeted to compensate loss and damage in poor countries particularly vulnerable to the impacts of climate change, can result in strong inequality reductions, and significant welfare increases for low income countries. Differentiated taxes with country-level redistribution can have positive effects,

especially on inequality, but those mainly happen after 2050, when poorer countries have larger carbon tax revenues to redistribute.

Unilateral emission reduction efforts are often challenged by carbon leakage — the phenomenon that policies may partly relocate carbon emissions rather than reduce them on a global scale. The carbon leakage debate centers around carbon pricing and regulation measures and leaves consumers in a very passive role. We investigate whether consumers’ green preferences can alter leakage patterns of typical climate policies and whether emission reductions resulting from a shift towards such green preferences are less prone to leakage. We incorporate green preferences into a quantitative trade and environment model and simulate (i) an increase in the EU emission price and (ii) a shift in European preferences towards cleaner goods. We find that the mere presence of green preferences can to some extent reduce the leakage problem of unilateral climate policy, but emission reductions resulting from a greening of consumption choices face significantly lower leakage.

The choice of the best climate policy instrument is at the core of environmental economic research and a current problem in economic policy making. As markets are often characterised by market power and climate policy is mostly unilateral the choice is not straight forward and sub-optimal choices can result in losses for households and firms. We study the question of policy performance under different degrees of market power using the example of the global aviation market. In contrast to most other studies we go beyond an assessment of specific (geographical) markets or specific policies. We develop a spatial, general equilibrium model of the global aviation market that allows us to model different degrees of market power, ranging from perfect competition to high mark-ups under a Cournot oligopoly. We assume that airlines have two channels to abate carbon emissions. The first is by reducing the number of transported passengers and the second is through a fuel switch from conventional jet fuel to sustainable aviation fuel (SAF). Using a granular dataset on booking numbers and prices we take the model to the data. We analyze the welfare, market and environmental effects of policies that contribute to the decarbonization of global aviation and incentivize the adoption of sustainable aviation fuels. Our results suggest that, as expected, in an undistorted market with perfect competition emissions pricing under a cap reduces welfare less than reaching the same emissions target via a SAF quota. The opposite is true under a Cournot oligopoly with a high degree of market power, where the SAF quota performs better.

Curbing land transportation emissions is one of the most important elements of climate change policies. The European Union (EU) will introduce a new EU-wide Emission Trading System (EU ETS 2) in 2027 to include the sector’s emissions at a price capped at C45 in initial years. However, as the Irish carbon tax is expected to reach a level of C78.5, the sector will be exempted from the new system. This paper examines the implications of the new system by asking three sets of counterfactual scenarios with different EU ETS 2 coverage, price, and free allowances. The results indicate that including the sector in the new or existing EU-wide carbon market would generate larger emissions reductions if and only if the EU-wide carbon price is substantially larger than the Irish carbon tax.