Vertical Targeting and Leakage in Carbon Policy

American Economic Review · 2011 · Volume 101 · Issue 3

Abstract

This paper examines the intersection between two aspects of climate policy design. The first is the point of regulation: should it be placed on pollution sources, carbon-rich inputs, or consumers? The second aspect concerns the external effects of a local climate policy. Leakage occurs when partial regulation results in an increase in emissions in unregulated parts of the economy. Our model demonstrates how directly regulating polluters can increase foreign emissions while indirect regulation (either upstream or downstream of the pollution source) will decrease foreign emissions. The net effect on combined domestic and foreign emissions will depend on market elasticities.

Keywords

Positive Analysis of Policy-Making and Implementation, Climate, Natural Disasters, Global Warming, Environmental Economics: Government Policy

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