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Alternative approaches for levelling carbon prices in a world with fragmented carbon markets

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Author Info

  • Lanzi, Elisa
  • Chateau, Jean
  • Dellink, Rob

Abstract

When carbon markets are fragmented and carbon prices vary across regions, concerns arise that acting countries may encounter competitiveness and welfare losses and changes in production may lead to carbon leakage. Border Carbon Adjustments (BCAs) have been proposed as a response measure to address these issues. However, more cooperative response policies, such as linking carbon markets, can also reduce the burden of emission reduction in acting countries and help level carbon prices. This paper analyses the effects of BCAs and both direct and indirect linking on welfare, competitiveness and carbon leakage within a global recursive-dynamic computable general equilibrium (CGE) model. Results illustrate that an uneven carbon pricing can indeed lead to substantial competitiveness and welfare losses for acting countries as well as to carbon leakage. Of the instruments investigated in this paper, BCAs appear to be the best measure to preserve the competitiveness of acting countries as they shift part of the burden of emission reductions to non-acting countries. While BCAs are effective for acting countries, they cause severe welfare and competitiveness losses for non-acting countries. As a result, BCAs are less effective than linking in reducing global welfare losses, as linking tends to be beneficial for both acting and non-acting countries. The advantages of BCAs diminish as the carbon market is extended to more emission sources or to a wider international participation.

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File URL: http://www.sciencedirect.com/science/article/pii/S0140988312001867
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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 34 (2012)
Issue (Month): S2 ()
Pages: S240-S250

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Handle: RePEc:eee:eneeco:v:34:y:2012:i:s2:p:s240-s250

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Web page: http://www.elsevier.com/locate/eneco

Related research

Keywords: Climate mitigation policy; Competitiveness; Carbon leakage; General equilibrium;

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Cited by:
  1. Weitzel, Matthias & Peterson, Sonja, 2012. "Border carbon adjustment: Not a very promising climate policy instrument," Kiel Policy Brief 55, Kiel Institute for the World Economy (IfW).
  2. Branger, Frédéric & Quirion, Philippe, 2014. "Would border carbon adjustments prevent carbon leakage and heavy industry competitiveness losses? Insights from a meta-analysis of recent economic studies," Ecological Economics, Elsevier, vol. 99(C), pages 29-39.
  3. repec:hal:ciredw:halshs-00870689 is not listed on IDEAS
  4. Stephan Schott, 2013. "Carbon Pricing Options for Canada," Canadian Public Policy, University of Toronto Press, vol. 39(s2), pages 109-124, August.

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