The OFS Lecture 2020 - Peter Birch Sørensen, University of Copenhagen

"Optimal carbon taxation with carbon leakage at the extensive and the intensive margin: Proposal for a carbon tax reform" - OFS lecture with Peter Birch Sørensen

Man wearing black with glasses and beard.

Photo: UCHP

Oslo Fiscal Studies (OFS) invites to the annual OFS lecture. The OFS lecture gives a stage for central actors from research and public administration to present new perspectives on key issues in the making and implementation of public policies.

For this year's lecture, Peter Birch Sørensen, Professor of Economics at the University of Copenhagen, and International Research Fellow in both the CESifo research network and the Oxford University Centre for Business Taxation, will discuss how to design carbon taxation in small open economies. The lecture is open for all. 

About OFS

Oslo Fiscal Studies is a research center located at the Department of Economics, University of Oslo, focused on research in public economics in general and taxation in particular. OFS is financed by the Research Council of Norway.


The lecture discusses the optimal design of carbon taxation in a small open economy where the government is committed to a target for reduction of CO2 emissions from domestic territory but where it is also concerned about carbon leakage. The lecture highlights the importance of distinguishing between between leakage at the extensive margin where firms may relocate to a foreign country to avoid the domestic carbon tax, and leakage at the intensive margin  where domestic firms lose world market shares to foreign competitors due to the tax. The lecture shows that when leakage occurs at the extensive margin, the leakage rate is likely to be much higher than the rate of leakage at the intensive margin. The optimal carbon tax scheme therefore includes a lump sum subsidy to domestic firms to counteract carbon leakage at the extensive margin. The subsidy may be implemented by taxing emissions above a historical baseline level and subsidizing emission reductions below the baseline level at a similar rate. Optimal taxation also requires that carbon tax rates be differentiated across sectors according to their different leakage rates. The final part of the lecture presents a concrete proposal for an operational carbon tax reform building on the principles outlined above. Using data for Denmark, it is shown how potentially undesirable distributional effects of carbon taxation may be neutralized through simple adjustments of the tax-transfer system.

Published Feb. 12, 2020 1:55 PM - Last modified Feb. 12, 2020 1:55 PM