Climate Policy and the Problem of Competitiveness: Border Tax Adjustments or Integrated Emission Trading?

Andreas Löschel, Victoria Alexeeva-Talebi and Tim Mennel

No 08-061, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: In the absence of an international agreement on climate policy, unilateral carbon abatement creates two problems: It tends to have a detrimental effect on domestic competitiveness, and it leads to an increase in carbon emissions abroad (leakage). This paper analyses two policies that have recently been proposed to mitigate these problems: Border tax adjustments (BTA) and integrated emission trading (IET). The former policy levies a quantity-based, the latter an emission based duty on imports from non-abating countries. In a stylised two-country model we demonstrate that the policies address both problems. However, BTA protects domestic competitiveness more effectively, while IET achieves a greater reduction in foreign emissions. A computational general equilibrium analysis of the unilateral abatement policy adopted by the European Union confirms our theoretical insights for the sectors covered by the offsetting measures. However, the implications for the competitiveness of noncovered sectors are negative. These two effects constitute the central trade-off in the implementation of both policies.

Keywords: Border Tax Adjustments; Climate Policy; Competitiveness; Emission Trading (search for similar items in EconPapers)
JEL-codes: D58 F18 H23 Q48 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cmp, nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:7384

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