Transboundary effects of environmental policy: Markets and emission leakages

One of many explanations for Environmental Kuznets Curves for rich countries can be that dirty production is relocated to economies with laxer abatement regimes. If this is caused by national abatement policies, environmental stresses are transferred to other countries. Further, the economic costs of national abatement policies can be shared with foreigners to some extent, both through a lower demand for imports and losses of market shares for foreign competitors that produce cleaner products. We quantify effects internally and abroad of a growth-induced unilateral carbon tax policy in a rich open economy. We find that the environmental benefits fall, and the economic costs rise, when a global rather than a national perspective is employed.