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By Don Fullerton, Daniel H. Karney and Kathy Baylis


We build a simple analytical general equilibrium model to find a closed-form expression for the effect of a small increase in carbon tax on leakage – the increase in emissions elsewhere. The model has two goods produced in two sectors or regions. Many identical consumers buy both goods using income from fixed stocks of labor and capital that are mobile between sectors. The usual result is that an increase in one sector’s carbon tax raises the price of its output, so consumption shifts to the other good, causing positive leakage. Here, we make three contributions. First, we find a new, substantial negative effect on leakage: the taxed sector substitutes away from carbon into capital or labor, so it absorbs resources, shrinks the other sector, and reduces their emissions. This latter “abatement resource effect ” could swamp the usual positive effect and reduce emissions in the other sector. Second, we extend that model to identify a total of six leakage terms – two positive and four negative. Third, we use our analytical model to “unpack ” existing computer model results [not yet done]. We can aid the interpretation of any model’s numerical result for leakage by showing the relative size of each component, and what parameters are driving the size of each effect

Year: 2012
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