Intertemporal properties of an international carbon tax

Abstract

For national environmental problems, appropriately designed emission taxes lead to efficient outcomes. The paper gives an analysis of the properties of an international tax on CO 2 emissions. A uniform CO 2 tax for all countries does not necessarily give the first best social optimum. In practice, however, a uniform tax at an appropriate level will give an allocation of emissions which is very close to the allocation in the first-best optimum. CO 2 emissions affect the climate through cumulative emissions. In a dynamic game of CO 2 emissions, it is shown that the tax giving a Pareto optimal solution is the same for the open loop and the perfect equilibrium, in spite of the fact that these two equilibria differ in the absence of a CO 2 tax.