Carbon emission control, tariff-carbon tax reform and intersectoral migration in the presence of international capital inflows

Abstract

As highlighted by the World Bank (2023), multinational enterprises (MNEs) can provide both a fundamental risk to and an opportunity for climate change mitigation. It is critical for policymakers to consider policies involving MNEs for both trade openness and carbon emission controls. This paper employs a modified version of the urban–rural migration model, incorporating mobile capital and multinational firms, to analyze the policy effects of carbon tax and tariff on urban unemployment and national income. Assuming independent policy implementation, the study finds that increasing the carbon tax on pollution-generating production raises urban unemployment rates, while increasing tariffs reduces them. The intersectoral wage gap is a key determinant of the policy effect on urban unemployment levels. The paper further highlights that the elasticity of factor demand in relation to the carbon tax is crucial for understanding its effects on national income. An increase in carbon tax on dirty factor increases (decreases) the national income if, and only if the dirty factor demand elasticity relating to carbon tax is smaller (larger) than one. Likewise, an import tariff on the importable manufacturing good increases the national income if, and only if, the import elasticity with respect to the tariff is smaller than one. Additionally, a point-by-point tariff-tax reform unambiguously raises urban unemployment rates, though it may reduce unemployment levels under certain conditions. If the import elasticity related to the tariff is significantly high (low), then the policy reform will increase (decrease) national income.