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

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  • Monjon, Stéphanie
  • Quirion, Philippe

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). This holds even if the border adjustment does not include indirect emissions, if it is based on EU (rather than foreign) specific emissions, or (for some values of the parameters) if it covers only imports. 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, which may ease climate policy adoption.

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Bibliographic Info

Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/7346.

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Date of creation: Sep 2011
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Publication status: Published in Ecological Economics, 2011, Vol. 70, no. 11. pp. 1957-1971.Length: 14 pages
Handle: RePEc:dau:papers:123456789/7346

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Keywords: Emission trading; border adjustment; output‐based allocation; competitiveness; carbon leakage;

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References

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Citations

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Cited by:
  1. Michael Jakob & Robert Marschinski & Michael Hübler, 2013. "Between a Rock and a Hard Place: A Trade-Theory Analysis of Leakage Under Production- and Consumption-Based Policies," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 56(1), pages 47-72, September.
  2. Zhang, Zhong Xiang, 2012. "Competitiveness and Leakage Concerns and Border Carbon Adjustments," International Review of Environmental and Resource Economics, now publishers, vol. 6(3), pages 225-287, December.
  3. repec:hal:ciredw:hal-00866408 is not listed on IDEAS
  4. Ralf Martin & Mirabelle Muûls & Ulrich J. Wagner & Laure B. de Preux, 2012. "Industry Compensation Under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme," CEP Discussion Papers dp1150, Centre for Economic Performance, LSE.
  5. repec:hal:wpaper:hal-00866408 is not listed on IDEAS
  6. repec:hal:ciredw:hal-00672907 is not listed on IDEAS
  7. Bao, Qin & Tang, Ling & Zhang, ZhongXiang & Wang, Shouyang, 2013. "Impacts of border carbon adjustments on China's sectoral emissions: Simulations with a dynamic computable general equilibrium model," China Economic Review, Elsevier, vol. 24(C), pages 77-94.
  8. Quirion, Philippe & Monjon, Stéphanie, 2011. "A border adjustment for the EU ETS: Reconciling WTO rules and capacity to tackle carbon leakage," Economics Papers from University Paris Dauphine 123456789/10122, Paris Dauphine University.
  9. 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.
  10. repec:ner:dauphi:urn:hdl:123456789/10971 is not listed on IDEAS
  11. Monjon, Stéphanie & Quirion, Philippe, 2011. "Which design of a border adjustment for the EU ETS? A quantitative assessment," Economics Papers from University Paris Dauphine 123456789/10971, Paris Dauphine University.
  12. Hallegatte, Stephane & Fay, Marianne & Vogt-Schilb, Adrien, 2013. "Green industrial policies : when and how," Policy Research Working Paper Series 6677, The World Bank.
  13. Santamaría, Alberto & Linares, Pedro & Pintos, Pablo, 2014. "The effects of carbon prices and anti-leakage policies on selected industrial sectors in Spain – Cement, steel and oil refining," Energy Policy, Elsevier, vol. 65(C), pages 708-717.
  14. Anderson, Blake & M'Gonigle, Michael, 2012. "Does ecological economics have a future?," Ecological Economics, Elsevier, vol. 84(C), pages 37-48.
  15. Irfanoglu, Zeynep Burcu & Golub, Alla A. & Hertel, Thomas W. & Henderson, Benjamin B., 2012. "Effects of carbon-based border tax adjustments on carbon leakage and competitiveness in livestock sectors," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 125006, Agricultural and Applied Economics Association.
  16. Guy Meunier & Jean-Pierre Ponssard & Philippe Quirion, 2012. "Carbon Leakage and Capacity-Based Allocations. Is the EU right?," CESifo Working Paper Series 4029, CESifo Group Munich.
  17. López, Luis Antonio & Arce, Guadalupe & Zafrilla, Jorge Enrique, 2013. "Parcelling virtual carbon in the pollution haven hypothesis," Energy Economics, Elsevier, vol. 39(C), pages 177-186.
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