Carbon taxation in a global production network

Abstract

Herein we study carbon taxation considering the structure of the global production network. With this purpose we characterize how the implementation of a carbon tax in one country-sector can generate sizeable fluctuations on global emissions and welfare through its impact on the structure of production. We then apply this theoretical characterization to accommodate the structure of a multi-regional input–output database. This framework allows us to identify the country-sectors that should be taxed to reach the strongest potential for emission reduction (or welfare maximization) if no coordinated policy is possible. Interestingly, this choice not only depends on emission intensity but also on to which extent the sector is central in the global production network as well as on the pass-through effect on public or private spending. Additionally, we find that synergies between taxes applied to different country-sectors have a strong impact in emission reductions, calling for greater harmonization in carbon taxation around the world. We then use our model to simulate the impact of the European Carbon Border Adjustment Mechanism (CBAM) finding that, when looked into sector by sector, it reduces EU competitiveness loss due to carbon pricing but, when generalized to all EU sectors, the impact through the value chain ends up provoking a stronger contraction in the EU than without the CBAM.