Presenter: Esteban Rossi-Hansberg

Authors: Bruno Conte, Universita’ di Bologna Klaus Desmet, SMU  Esteban Rossi-Hansberg, University of Chicago

Time & Location

07 March 2023, 12:00 pm – 1:00 pm AEDT
e61 Institute, Level 3/17-21 Bellevue Street Surry Hills NSW 2010, Australia | Online

About the event

A unilateral carbon tax trades off the distortionary costs of taxation and the future gains from slowing down global warming. Because the cost is local and immediate, whereas the benefit is global and delayed, this tradeoff tends to be unfavorable to unilateral carbon taxes. We show that this logic breaks down in a world with trade and migration where economic geography is shaped by agglomeration economies and congestion forces. Using a multisector dynamic spatial integrated assessment model (S-IAM), this paper predicts that a carbon tax introduced by the European Union (EU) and rebated locally can, if not too large, increase the size of Europe’s economy by concentrating economic activity in its high-productivity non-agricultural core and by incentivizing immigration to the EU. The resulting change in the spatial distribution of economic activity improves global efficiency and welfare. A unilateral carbon tax with local rebating introduced by the US generates similar global welfare gains. Other forms of rebating can dilute or revert this positive effect.