Drastically reducing greenhouse gas emissions involves numerous specific actions in each sector of the economy. The related costs and abatement potential of these measures are not independent from each other because of sectoral linkages. For instance, the carbon footprint of electric vehicles depends on the electricity mix, an issue that have received a large attention but little economic analysis. The present paper addresses the issue of sectoral policy coordination, especially when Pigovian carbon pricing is unavailable.
It analyzes the optimal allocation of mitigation effort among two vertically connected sectors, an upstream (e.g. electricity) and a downstream (e.g. transportation) one. The clean downstream technology consumes the upstream good and may thus shift emissions to the upstream sector. Using a simple partial equilibrium model, we characterize optimal second-best policies in presence of imperfect carbon taxation. We analyze how upstream emissions should be incorporated into the subsidy of the downstream technology, and consider the optimal coordination of both upstream and downstream subsidies to clean technologies.