Finance Seminar: Hendrik Hakenes, Bonn

Presenter: Hendrik Hakenes, Bonn

Title: Carbon at the Border -- Taxes, Tariffs and Financial Markets in a Globalized Economy

Abstract: Climate policy design must account not only for emissions in product markets, but also for the role of financial markets in shaping production and investment decisions. This paper studies optimal unilateral carbon policy when emissions-intensive production is connected to product, labor, and capital markets. We show that (i) a country should optimally impose a tax on investment into polluting industries, both at home and abroad; (ii) it should implement a carbon tax (or an ETS) for domestic polluting industries; (iii) it should impose tariffs on imported goods from polluting industries, but at a rate below the domestic carbon tax; (iv) if investments in polluting industries are difficult to tax, carbon taxes and tariffs should be higher, but this leads to higher than optimal domestic production and consumption given the externality; and (v) the optimal carbon tax discount on imported goods is independent of the taxability of polluting investments. Finally, we show that the investment tax can be implemented through a capital gains tax on polluting industries.

Host: Stefan Hirth

See all Finance Seminars