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

Stéphanie Monjon and Philippe Quirion

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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). 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.

Keywords: Emission trading; border adjustment; output-based allocation; competitiveness; carbon leakage; système de permis négociables; ajustement aux frontières; allocation basée sur la production; compétitivité; fuites de carbone (search for similar items in EconPapers)
Date: 2010-12
Note: View the original document on HAL open archive server: https://hal.science/hal-00866444v1
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: 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? (2011)
Working Paper: Addressing leakage in the EU ETS: Border adjustment or output-based allocation ? (2010)
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