Variable carbon pricing and the environmental gains from trade

In this Kühne Impact Series, we continue our analysis of carbon pricing and its effect on global emissions, production, and trade in more realistic configurations of heterogeneous carbon pricing across countries. We identify three key findings. First, heterogeneous carbon pricing is always less efficient than uniform carbon pricing, as it invariably increases the global real income cost of the scheme. Second, the potential of green sourcing in international trade to combat climate change can be maximized through a targeted taxing scheme involving a select group of key players, provided they are both major producers and significant polluters. Finally, and perhaps contrary to intuition, heterogeneous carbon pricing is not a guarantee of increased fairness across countries. In fact, it is more often a source of increased inequalities.