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Robust policies to mitigate carbon leakage

Christoph Böhringer, Knut Einar Rosendahl () and Halvor Briseid Storrøsten

Journal of Public Economics, 2017, vol. 149, issue C, 35-46

Abstract: Unilateral climate policy induces carbon leakage through the relocation of emission-intensive and trade-exposed industries to regions without emission regulation. Previous studies suggest that emission pricing combined with border carbon adjustment is a second-best instrument, and more cost-effective than output-based rebating. We show that the combination of output-based rebating and a consumption tax for emission-intensive and trade-exposed goods can be equivalent with border carbon adjustment. Moreover, it is welfare improving for a region that implements emission pricing along with output-based rebating to introduce such a consumption tax. The welfare gain is particularly large if output-based rebating is already implemented for a sector that is not much exposed to leakage, e.g., due to uncertainty about exposure or due to lobbying activities. Thus, supplementing output-based rebating with a consumption tax constitutes robust policies to mitigate carbon leakage.

Keywords: Carbon leakage; Output-based rebating; Border carbon adjustment; Consumption tax (search for similar items in EconPapers)
JEL-codes: D61 F18 H23 Q54 (search for similar items in EconPapers)
Date: 2017
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