ENVIRONMENTAL ECONOMICS Harvard Case Solution & Analysis

Environmental Economics Case Study Solution

Answer # 1:

Carbon Leakage

Carbon leakage refers to the increase of carbon dioxide from one country due to the reduction of emission of another country through certain economic policies. This occurs when one country raises costs for the production of goods to reduce the emissions of air pollution, the manufacturers will move to a different country having careless emission policies with lower standards, and thus it will cause no impact on the reduction of global emissions.

Another reason for why the carbon leakage occurs is that when the government charges a premium on the fuels and other commodities, this causes the demand to decline and thus the price to fall. The country with no premium on the fuels and commodities will cause a higher demand, and no changes will be on reduction of global emissions (Sheldon & McCorriston, 2011).

Carbon Leakage Theory by Michael Hoel

Michael Hoel is one of the professors of economics who worked with the issues of natural resources such as coal, oil, gas, carbon and etc. He wrote many articles on controlling of emissions of pollution through certain economic policies for the impact on the global warming. He quoted in most of the articles that the cooperation of all the countries is a must for making strict climate policies for the reduction of emissions in which every country must follow and does not take advantage of it. He further explained that there is no point in following climate policy if uncooperative have no such rules and policy on carbon tax for reducing carbon leakage or import and export tariff for controlling the prices affected on the international trade.

The issues of carbon leakage and competitiveness are highly related to one another. Hoel in most of his articles explained that there are many policies instruments for preventing of carbon leakage when the situation is that one country commits to strict climate policies while another country is a free-rider and does not implement any climate policy. He further quotes that a great reduction in the emissions can be obtained if the countries cooperate with each other and set carbon taxes and implement the use of import tariffs on all the trading goods, this will cause a reduction in carbon leakage as the free-riding countries will have to follow the same policies and no longer take advantage in other countries.

International community fulfilment on their commitment

The international community can ensure that the companies ful fil their commitment to internalize international externalities by making a climate agreement which is agreeable to all the countries. Consumption and production of fuels should be directed in the policies for reducing the emissions of pollution. The policy instrument which would be mostly used for making the strict climate policy is the carbon tax and also the production and consumption taxes.The results of such policy would impact the production to decrease, but the emissions of pollution would also fall. The production and consumption of the carbon should be taxed at a positive rate.The problem of these carbon tax would result in a reduction of products thus will decrease the GDP of the country’s economy.

It is vital for the un-cooperating states to follow the same rules and policies as the cooperating countries, such as the tax rate imposed on the production and consumption of fuels to prevent global warming. The cooperating countries which are implementing the policies of strict climate should try to encourage the un-cooperating countries to follow the same policies for lowering the consumption and production of the fuels. The international communities could achieve in transferring the policies to the un-cooperating countries by bargaining and arguing the benefits it will bring to the environment. The stubborn countries will gain the same welfare as the cooperative market with the same climate policy. (Hoel, Efficient Climate Policy in the Presence of Free Riders, 1994)

There are also some problems and issues caused by following the same climate policy for reducing the emissions as it will affect the international prices of the traded goods. To overcome this problem and challenge it is important for the international committee to set the import and export tariffs as well whose prices may affect the policies for reducing emissions, along with the carbon tax. This step would encourage the un-cooperative countries to take part in the similar policies of cooperative countries for the reducing of emissions. (Hoel, Should a carbon tax be differentiated across sectors?, 1996)


ENVIRONMENTAL ECONOMICS Harvard Case Solution & Analysis


Answer # 2:

Double Dividend Hypothesis:

The use of energy and fossil fuels results in hidden costs which result in pollution and environmental damages. The government charges an environmental tax which benefits in two ways, the first benefit it has that it causes a reduction in the pollution and improvement of the environment (First dividend) and the second benefit is that it reduces the costs of tax (Second dividend). This system or principle goes by the name of the double dividend hypothesis.

The revenue obtained by the government through environmental tax could be used for reducing the burden of overall tax and also the improvement on the performance of the economy. The revenue recycling effect refers to the reduction of taxes such as the social security taxes and corporate income taxes. The advantage of the reduction of these taxes will result in an increase in employment and investment, therefore the increase in the growth of the economy. Many of the economists have argued that the revenue earned by the government from the environmental taxes for reducing pollution could not cause them to decrease other taxes as well such as the income and social taxes.....................

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