Abstract

We develop an international oligopoly model to analyze the home country's unilateral carbon taxes and border tax adjustments (BTAs) when firms can abate emissions. We explore three policy regimes: i) carbon taxes alone (no BTAs); ii) carbon taxes with carbon-content tariffs (partial BTAs); and iii) carbon taxes with both tax refunds for exports and carbon-content tariffs (full BTAs). According to our findings, carbon taxes may not be effective in decreasing global emissions. Interestingly, an increase in the carbon tax rate can increase global emissions. High tax rates may discourage emission abatement. With fixed firm locations, no BTAs or partial BTAs can be more effective in reducing global emissions than full BTAs. When firm locations are endogenous, firms tend to produce in the foreign country to avoid the home carbon tax with no BTAs. However, with BTAs, high tax rates do not necessarily induce foreign production. Global emissions could be largest in the middle range of the tax rate.