Addressing leakage in the EU ETS: Border adjustment or output-based allocation?

Stéphanie Monjon and Philippe Quirion

Ecological Economics, 2011, vol. 70, issue 11, 1957-1971

Abstract: The EU ETS has been criticised for threatening the competitiveness of European industry and generating carbon leakage, i.e. increasing foreign greenhouse gas emissions. Two main options have been put forward to tackle these concerns: border adjustments and output-based allocation, i.e. allocation of free allowances in proportion to current production. We compare various configurations of these two options, as well as a scenario with full auctioning and no border adjustment. Against this background, we develop a model of the main sectors covered by the EU ETS: electricity, steel, cement and aluminium. We conclude that the most efficient way to tackle leakage is auctioning with border adjustment, which generally induces a negative leakage (a spillover). This holds even if the border adjustment does not include indirect emissions, if it is based on EU (rather than foreign) specific emissions, or (for some values of the parameters) if it covers only imports. Another relatively efficient policy is to combine auctioning in the electricity sector and output-based allocation in exposed industries, especially if free allowances are given both for direct and indirect emissions, i.e. those generated by the generation of the electricity consumed. Although output-based allocation is generally less effective than border adjustment to tackle leakage, it is more effective to mitigate production losses in the sectors affected by the ETS, which may ease climate policy adoption.

Keywords: Emission; trading; Border; adjustment; Output-based; allocation; Competitiveness; Carbon; leakage (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (85)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0921800911001893
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Addressing leakage in the EU ETS: Border adjustment or output-based allocation? (2011)
Working Paper: Addressing leakage in the EU ETS: Border adjustment or output-based allocation ? (2010)
Working Paper: Addressing leakage in the EU ETS: Border adjustment or output-based allocation ? (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolec:v:70:y:2011:i:11:p:1957-1971

Access Statistics for this article

Ecological Economics is currently edited by C. J. Cleveland

More articles in Ecological Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().