Smart hedging against carbon leakage

Christoph Böhringer, Knut Einar Rosendahl and Halvor Briseid Storrøsten ()
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Halvor Briseid Storrøsten: Statistics Norway, Oslo / Norway

No 14-2015, Working Paper Series from Norwegian University of Life Sciences, School of Economics and Business

Abstract: Unilateral climate policy induces carbon leakage through the relocation of emission-intensive and trade-exposed industries to regions with no or more lenient emission regulation. Both analytical and numerical studies suggest that emission pricing combined with border carbon adjustment is a secondbest instrument, and more cost-effective than output-based rebating, in which case domestic output is indirectly subsidized. No country has so far imposed border carbon adjustment, while variants of output-based rebating have been implemented. In this paper we show that combining output-based rebating for emission-intensive and trade-exposed goods with a consumption tax on the same goods can be equivalent with border carbon adjustment. Moreover, we demonstrate that it is welfare improving for a region which has already implemented emission pricing along with output-based rebating to also introduce such a consumption tax. We conclude that supplementing output-based rebating with a consumption tax constitutes smart hedging against carbon leakage: Compared to output-based rebating stand-alone it constitutes a robust strategy for improving cost-effectiveness of unilateral climate policy; compared to border carbon adjustment it limits the risks of potentially detrimental trade disputes.

Keywords: Carbon leakage; output-based rebating; border carbon adjustment; consumption tax (search for similar items in EconPapers)
JEL-codes: D61 H23 Q54 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2015-09-18
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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Related works:
Journal Article: Smart hedging against carbon leakage (2021)
Working Paper: Smart Hedging Against Carbon Leakage (2019)
Working Paper: Smart hedging against carbon leakage (2019)
Working Paper: Smart hedging against carbon leakage (2019)
Working Paper: Smart hedging against carbon leakage (2019)
Working Paper: Smart hedging against carbon leakage (2015)
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