Carbon pricing and general equilibrium under Leontief production technology

Comparing temperature and emissions data does not clearly show a relationship between the two variables. Going further, this study combines Leontief production technology with a computable general equilibrium model of global trade in order to quantitatively test the implications of mitigation policies for welfare and the environment. We compute optimal emissions taxes and show that administering carbon fees reduces environmental damages by nearly 50%. However, there is a tradeoff effect on production which calls for caution when implementing environmental policies. In general, environmental benefits and resources shifting due to carbon taxes lead to welfare gains.