Carbon tax, emission permits, and carbon leak under price competition

Carbon tax polices in a country are often criticized as leading to production shifting to other unregulated countries (”carbon leak”). We analyze here the different impact on leakages and trade of a carbon tax and of an emission permit policy enacted by one country (the ”home” country) in a two country model of price competition with differenti- ated products. A lower carbon leak, a reduction in global emissions, and an im- provement in traded volumes can be achieved by means of an emission standards, whereas a carbon tax improves the traded values; govern- ments may have to face a trade-off↵ between leakages and trade balance.