https://macropaperwarehouse.com/authors/bruno-conte/Bruno ConteHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/on-the-geographic-implications-of-carbon-taxes/https://macropaperwarehouse.com/papers/on-the-geographic-implications-of-carbon-taxes/<p>Standard analyses of unilateral carbon taxes ignore the spatial reallocation of economic activity induced by the policy, leading them to overstate the costs and understate the effectiveness of such taxes. Using a multi-sector dynamic Spatial Integrated Assessment Model (S-IAM) calibrated to over 17,000 locations worldwide, the paper shows that a European Union carbon tax introduced unilaterally — if accompanied by <em>local rebating</em> of tax revenues to the residents of the taxing region — expands the size of the EU economy and improves global welfare. The mechanism: the carbon tax falls disproportionately on non-agricultural, energy-intensive sectors and effectively shifts part of its incidence onto trading partners via higher goods prices, while the rebate accrues only to EU residents, raising EU income per capita and attracting migrants. Under a 40 USD/tCO₂ EU tax with local rebating, EU real income rises by 0.46% in 2021 and EU population rises by 1.1%; without rebating, EU real income falls by 4.96% in 2021. EU CO₂ emissions fall by 41% by 2100, but global emissions fall by only 3% due to carbon leakage — production shifts to US, Japanese, and other unregulated regions, raising US and Japanese emissions by 12% on impact. Global real income per capita declines by 0.63% by 2100 without rebating, while global welfare improves with local rebating as economic activity concentrates in high-productivity non-agricultural regions. Rebating revenues to developing countries instead of locally slows migration to the EU, reduces the spatial efficiency gain, and deteriorates global welfare relative to the local-rebating benchmark.</p>