EUROPEAN UNION CARBON TAX

This teaching note, prepared by Scott Barrett for the World Resources Institute's Sustainable Enterprise Program, provides a framework for a classroom negotiation exercise regarding a proposed European Union carbon tax. It combines negotiation theory with a case study on the economic and environmental challenges of implementing regional climate policies, specifically focusing on the risks of 'leakage' and loss of competitiveness.

• The European Union's Energy and Environment Ministers declared on October 29, 1990, a goal to stabilize total CO2 emissions at 1990 levels by the year 2000. The European Commission estimated that without new policies, emissions would have been 12% higher in 2000 than in 1990, meaning a 12% reduction was necessary to meet the target.
• A primary obstacle to the adoption of a carbon tax within the EU is the fear of losing competitiveness. There is a risk that individual countries may 'free-ride' by avoiding the tax to create a national competitive advantage through lower fossil fuel energy costs, while still benefiting from the emissions reductions of others.
• The document describes 'leakage' as a phenomenon where unilateral EU climate policies could increase emissions outside the region through two channels: shifting the comparative advantage to countries without the tax, and lowering international fossil fuel prices by reducing EU demand.
• The European Commission proposed a public finance justification for the carbon tax, suggesting that revenues from the tax could be used to reduce employer social security contributions. Research from 1994 indicated this could lead to a 1% reduction in unemployment in the long run.
• The teaching note utilizes a negotiation game with three parties (A, B, and C) to demonstrate joint gains through cooperation. A 'core' set of outcomes is defined where the total payoff is 1,436, and no party or coalition would want to withdraw, provided minimum payoffs are met: A ≥ 206, B ≥ 492, and C ≥ 631.
• The document references the May 1990 IPCC scientific assessment, which predicted that without abatement of carbon dioxide emissions, the Earth's global mean temperature would increase by approximately 1 degree Celsius by 2025 and 3 degrees Celsius by the end of the century.

APA

Barrett, S. (1994). EUROPEAN UNION CARBON TAX. World Resources Institute. https://pdf.wri.org/bell/case_1-56973-144-6_full_version_english.pdf

Chicago

Barrett, Scott. EUROPEAN UNION CARBON TAX. World Resources Institute, 1994. https://pdf.wri.org/bell/case_1-56973-144-6_full_version_english.pdf.

Wikipedia

{{cite report |last1=Barrett |first1=Scott |title=EUROPEAN UNION CARBON TAX |publisher=World Resources Institute |date=1994 |url=https://pdf.wri.org/bell/case_1-56973-144-6_full_version_english.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{barrett1994european, author = {Barrett, Scott}, title = {{EUROPEAN UNION CARBON TAX}}, institution = {World Resources Institute}, year = {1994}, url = {https://pdf.wri.org/bell/case_1-56973-144-6_full_version_english.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }