Modeling a world where one region imposes a climate policy and the rest of the world remains passive, researchers sought to solve for the leakage problem in climate policy. They reach four major conclusions about optimal carbon policy from their analysis, among them being that such a policy would: tax both the supply and demand for fossil fuels; tax domestic production of fossil fuels less than use of fossil fuels on the demand side; potentially only tax domestic production of fossil fuels on the demand side since it is simpler than also taxing domestic use and is almost as effective; and depend on foreign elasticity of energy supply in terms of efficacy.
Abstract and Citation
Weisbach, David and Kortum, Samuel S., Climate Change Policy in the International Context: Solving the Carbon Leakage Problem (January 16, 2023). U of Chicago, Public Law Working Paper No. 813, University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 971, Available at SSRN: https://ssrn.com/abstract=4328814 or http://dx.doi.org/10.2139/ssrn.4328814