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This chapter assesses the macroeconomic effects of carbon‐energy taxation introduced under unilateral environmental tax reform (ETR) in the 1990s undertaken in six member states of the European Union: Denmark, Finland, Germany, the Netherlands, Sweden, and the UK. The effects are estimated using the large‐scale Energy–Environment–Economy (E3) model for Europe, E3ME, which covers the countries involved as well as the complete single market, so that the effects on other economies can be considered, along with any effects on competitiveness. The method is to identify the key characteristics of the green tax reform packages and include these in the modelling of the price and non‐price effects of the ETR on energy use and international trade in E3ME. The effects are then compared with a ‘reference case’ (i.e. a counterfactual case) generated by E3ME over the period 1995–2012, including current and expected developments in the EU economy, e.g. the impact of the EU Emission Trading Scheme, but without the ETR. The revenue recycling meant that the cost of ETR to the economy was significantly reduced and in several cases resulted in an increase in GDP. The method for revenue recycling strongly affects the results, as does the scale of exemptions offered to certain fuel user groups.

In this chapter we provide an overview and interpretation of findings presented in this volume, while placing them in the context of the wider climate policy debate. We revisit the competitiveness issue and consider the findings presented in this book within the framework of the Porter hypothesis and Leibenstein's concept of X‐efficiency, both of which have been quoted in support of more vigorous energy and climate policy. Carbon leakage, which refers to the displacement of emissions to non‐carbon tax countries and regions, is a prominent concern in relation to specific industrial sectors and we examine the leakage rates identified here against the broader patterns of development in international trade and development, with particular attention directed towards developments in China and other emerging industrialized countries. The obvious challenge is to identify a formula that enables control while at the same time allowing for transformation of the global energy systems and continued economic growth, in particular in developing countries.

Carbon leakage occurs when attempts to reduce greenhouse gas emissions drive markets to respond in ways that allow emissions to expand elsewhere. Much attention has been paid to carbon leakage across space, particularly the emissions response of trading partners with weaker climate policies. However, carbon leakage can also occur over time, as the owners of fossil energy resources can modify the timing of their extraction in response to changes in future expectations; importantly, this form of leakage is absent in most major climate policy models. This chapter presents and parameterizes a model of oil markets reflecting the different sources, costs, and carbon intensities. In this framework, all kinds of climate policies—carbon pricing, innovating clean energy alternatives, energy efficiency improvements, and clean energy blend mandates, as well as carbon capture and storage—can reduce cumulative emissions over time, as higher cost / higher emitting oil reserves are left in the ground. Given the same cumulative emissions target, the effects of alternative climate policies on the speed of extraction (a measure of the green paradox) and on the rate of intertemporal leakage (a measure of the potential error of conventional emissions reduction forecasts) are compared. With plausible parameters, a green backstop technology policy induces similar extraction horizons as an emissions tax and possibly less intertemporal leakage. Energy efficiency improvements and blend mandates can significantly delay emissions but may have high intertemporal leakage rates if implemented quickly.

This chapter discusses the implications for climate and energy policy of increasing global trade and a shift of industrialized country economic activity towards services. Industrialized countries increasingly rely on energy consumed and emissions created during production processes that occur outside their own territory (so-called indirect emissions). As a result, emissions are leaked from countries with binding emission reduction targets to those currently without, through trade. This calls into question the effectiveness of climate policy based on fragmented territorial action in the absence of a global agreement on emissions reduction or a global carbon price. This chapter presents an alternative approach to climate policy that more effectively addresses indirect emissions. It briefly describes consumption-based emissions accounting methods used to quantify indirect emissions, and discusses potential policy options for incorporating indirect emissions into climate and energy policy.

Employing a Stackelberg differential game approach, the chapter derives the carbon tax chosen by a climate coalition of resource consuming countries which purchase the fossil resource from a representative competitive resource supplier. The global climate coalition reduces the speed at which the global fossil resource stock is depleted over time to the socially efficient level by levying the Pigou tax on resource consumption. If the climate coalition is incomplete, the chosen unilateral carbon tax falls short of the Pigou tax. Furthermore, international carbon leakage undermines the effectiveness of the unilateral carbon tax in slowing down the speed of global resource extraction. Nevertheless, under the assumptions made, also the incomplete climate coalition is able to slow down the speed of global extraction to some extent because the chosen carbon tax is time-consistent, irrespective of whether the coalition is global or incomplete.