Abstract:
This paper formulates a carbon taxation policy that may be undertaken unilaterally by nations seeking to reduce the risk of catastrophic climate change without putting themselves at an economic disadvantage, or simply shifting emissions abroad. Our proposed policy does this through a tax on the carbon content of products–regardless of origin–either based on emissions firms elect to certify through the program, or on the industry-average of emissions among firms that choose not to participate. As relatively clean firms join the program to benefit from a smaller tax bill, the average emissions of non-participants increases. This sets off a cascade of program participation based on the principle of adverse selection. The end result is that firms behave as if they were part of a global carbon tax program, even in the absence of a meaningful treaty. We extend this framework to more general policy settings in which heterogenous agents contribute to an externality that cannot be directly internalized for exogenous reasons–and show when opt-in policies can help approximate (or achieve) first-best outcomes.