Carbon pricing and industrial competitiveness: Border adjustment or free allocation?

Robert Ritz

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: To mitigate concerns about carbon leakage and industrial competitiveness, cap-and-trade systems have typically relied on the free allocation of carbon allowances to trade-exposed sectors. The European Union's Green Deal raises the prospect of free allocation being replaced by a carbon border adjustment mechanism (CBAM) on imported products. This paper provides a simple framework to analyze the competitiveness support provided by these policy instruments. It shows how the rate of carbon leakage can be a "sufficient statistic" to determine the output and profit impacts of the switch to a CBAM. High-leakage sectors will prefer the CBAM while low-leakage sectors will prefer free allocation.

Keywords: Cap-and-trade; carbon border adjustment; carbon leakage; industrial competitiveness (search for similar items in EconPapers)
JEL-codes: H23 L11 Q54 (search for similar items in EconPapers)
Date: 2022-05-27
New Economics Papers: this item is included in nep-ene, nep-env and nep-int
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Related works:
Working Paper: Carbon pricing and industrial competitiveness: border adjustment or free allocation? (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2234

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