DP1064 Can a Small Nation Gain from Introducing a Carbon Tax Early?

Author(s): Diderik Lund
Publication Date: December 1994
Keyword(s): Carbon Tax, Global Warming, Research and Development
JEL(s): Q25, Q32
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1064

Carbon dioxide emissions may cause global warming. But own emissions have negligible effects for a small nation, which may thus regard carbon taxes as distortionary. Such taxes may have other effects, however. When research and development (R&D) has positive external effects, carbon taxes may correct for some of these, by giving incentives for R&D in particular directions. This may be beneficial when the nation faces a binding international agreement on reducing emissions in a future period. This effect is analysed, both for a case with a carbon tax alone, and for two different cases with R&D subsidies as well. Finally, a different international agreement is considered, under which the tax revenue is collected domestically.