Vertical Targeting and Leakage in Carbon Policy


James B. Bushnell and Erin T. Mansur

American Economic Review Papers and Proceedings, Volume 101, Issue 3, May 2011,  pages 263-267.
Working Paper, January 2011.



This paper examines the intersection between two aspects of climate policy design. The first is the point of regulation: should it be placed on pollution sources, carbon-rich inputs, or consumers? The second aspect concerns the external effects of a local climate policy. Leakage occurs when partial regulation results in an increase in emissions in unregulated parts of the economy. Our model demonstrates how directly regulating polluters can increase foreign emissions while indirect regulation (either upstream or downstream of the pollution source) will decrease foreign emissions. The net effect on combined domestic and foreign emissions will depend on market elasticities.