Abstract
Carbon leakage and the relocation of firms is one of the main concerns of governments when choosing their climate policy. In a strategic trade model with endogenous plant location, we study the effect of border carbon adjustments (BCAs) on global welfare and emissions in an emission tax competition game between two asymmetric countries for two games: a simultaneous and a sequential game. Without BCAs, a ruinous “race to the bottom” with no relocation of firms is the only Nash equilibrium in a simultaneous game. In a sequential game, additionally, a “wise chicken” equilibrium may emerge where the Stackelberg leader gives in, letting all his/her plants relocate to avoid being stuck at the bottom. With BCAs, equilibrium emission taxes in both countries are higher, implying lower global emissions and usually higher global welfare in both games. With BCAs, the environmental more concerned country accepts that its firm partially relocates abroad, as it is rewarded with better control of global emissions, tariff revenues and higher net profits (profits minus taxes). This avoids high environmental damages and that either net profits are zero because of high subsidy levels in a “race to the bottom” or because all production plants have moved abroad.
| Original language | English |
|---|---|
| Pages (from-to) | 1266-1309 |
| Number of pages | 44 |
| Journal | Journal of Public Economic Theory |
| Volume | 24 |
| Issue number | 6 |
| Early online date | 23 Sept 2022 |
| DOIs | |
| Publication status | Published - 31 Dec 2022 |
Bibliographical note
Funding Information:We would like to thank Javier Rivas, Knut Einar Rosendahl, Maik Schneider, and Ralph Winkler for their helpful comments on earlier drafts. We are also grateful for the comments received at the EAERE conference in Manchester in 2019 and at the third AERNA Workshop on Game Theory and the Environment in Valencia in 2019. Moreover, we received extremely helpful comments by two anonymous reviewers and the editor Professor Amir. Noha gratefully acknowledges financial support from the Egyptian Ministry of Higher Education and Scientific Research, Egypt during her studies at the University of Bath.
Funding
We would like to thank Javier Rivas, Knut Einar Rosendahl, Maik Schneider, and Ralph Winkler for their helpful comments on earlier drafts. We are also grateful for the comments received at the EAERE conference in Manchester in 2019 and at the third AERNA Workshop on Game Theory and the Environment in Valencia in 2019. Moreover, we received extremely helpful comments by two anonymous reviewers and the editor Professor Amir. Noha gratefully acknowledges financial support from the Egyptian Ministry of Higher Education and Scientific Research, Egypt during her studies at the University of Bath. We would like to thank Javier Rivas, Knut Einar Rosendahl, Maik Schneider, and Ralph Winkler for their helpful comments on earlier drafts. We are also grateful for the comments received at the EAERE conference in Manchester in 2019 and at the third AERNA Workshop on Game Theory and the Environment in Valencia in 2019. Moreover, we received extremely helpful comments by two anonymous reviewers and the editor Professor Amir. Noha gratefully acknowledges financial support from the Egyptian Ministry of Higher Education and Scientific Research, Egypt during her studies at the University of Bath.
ASJC Scopus subject areas
- Sociology and Political Science
- Finance
- Economics and Econometrics
