Asymmetric Emission Regulations and Interventions of the Local Government

A carbon border tax, also known as the carbon border adjustment mechanism (CBAM), is a taxing mechanism for the emission levels of imported goods to prevent potential carbon leakage problem. In this study, we analyze a manufacturer's strategy that exports to two regions – one developed and one developing – and a local government's intervention against carbon border tax imposed by the developed region. We study two models. The first is a base model in which the manufacturer sets prices for both regions, and this model serves as a benchmark for the second model, the carbon border tax model. We study a three-stage problem in the carbon border tax model. In the first stage, the local government subsidizes the rate of technology investment cost to incentivize the manufacturer to invest in green technology. In the next stage, the manufacturer makes an investment decision for green technology by incurring lump-sum costs to reduce the unit emission level. In the final stage, the manufacturer sets prices for both regions. We analyze the three-stage problem and find that under some market conditions, neither the government's subsidy nor the carbon border tax causes a reduction in unit emission level. Asymmetric emission regulation may cause a shift in the manufacturer's market volumes from the developed region to the developing region; therefore, the total emission level potentially increases.

This is a joint work with Özgen Karer and Z. Pelin Bayındır.

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