Public Economics Commons^™

Negative Leakage, Kathy Baylis, Don Fullerton, Daniel Karney

Don Fullerton

Our analytical general equilibrium model solves for effects of a small increase in carbon tax on leakage – the increase in emissions elsewhere. Identical consumers buy two goods using income from endowments that are mobile between sectors. Usually an increase in one sector’s tax raises output price, so consumption shifts to the other good, causing positive leakage. Here, we find a new negative effect not recognized in existing literature: the taxed sector substitutes away from carbon into clean inputs, so it may absorb resources, shrink the other sector, and reduce their emissions. This “abatement resource effect” can offset most or …