Climate policy and fiscal constraints: Do tax interactions outweigh carbon leakage?

Carolyn Fischer*, Alan K. Fox

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review


Climate policymaking faces twin challenges of carbon leakage and public sector revenue requirements. A large literature advocates the use of CO2 pricing and recycling the revenues to lower distorting taxes as a way to minimize costs. In this paper, we explore the implications of labor tax interactions for cost-effectiveness of border adjustments and other measures to cope with leakage. We find that, for plausible values of labor supply elasticities, the cost savings from revenue recycling are significant-from 15 to 25%. The cost savings from anti-leakage measures are generally smaller, but also significant, particularly for small coalitions or more binding reduction targets. Tax interactions further enhance the cost savings from border adjustments, but make other measures like rebates or exemptions less attractive.

Original languageEnglish
JournalEnergy Economics
Issue numberSUPPL.2
Publication statusPublished - Dec 2012


  • Border adjustments
  • Carbon leakage
  • Climate policy
  • Tax interactions


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