Addressing leakage in the EU ETS: Border adjustment or output-based allocation?
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lars Mathiesen and Ottar Maestad, 2004. "Climate Policy and the Steel Industry: Achieving Global Emission Reductions by an Incomplete Climate Agreement," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 91-114.
- Catherine Boemare & Philippe Quirion, 2002.
"Implementing greenhouse gas trading in Europe: lessons from economic literature and international experiences,"
- Boemare, Catherine & Quirion, Philippe, 2002. "Implementing greenhouse gas trading in Europe: lessons from economic literature and international experiences," Ecological Economics, Elsevier, vol. 43(2-3), pages 213-230, December.
- Lund, Peter, 2007. "Impacts of EU carbon emission trade directive on energy-intensive industries -- Indicative micro-economic analyses," Ecological Economics, Elsevier, vol. 63(4), pages 799-806, September.
- Damien Demailly & Philippe Quirion, 2006. "CO2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: Grandfathering vs. output-based allocation," Post-Print halshs-00639327, HAL.
- Dixit, Avinash K & Stiglitz, Joseph E, 1975.
"Monopolistic Competition and Optimum Product Diversity,"
The Warwick Economics Research Paper Series (TWERPS)
64, University of Warwick, Department of Economics.
- Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
- Jean-Marc Burniaux & Jean Château & Romain Duval & Stéphanie Jamet, 2008. "The Economics of Climate Change Mitigation: Policies and Options for the Future," OECD Economics Department Working Papers 658, OECD Publishing.
- Welsch, Heinz, 2008. "Armington elasticities for energy policy modeling: Evidence from four European countries," Energy Economics, Elsevier, vol. 30(5), pages 2252-2264, September.
- Fischer, Carolyn & Fox, Alan K., 2009. "Comparing Policies to Combat Emissions Leakage: Border Tax Adjustments versus Rebates," Discussion Papers dp-09-02, Resources For the Future.
- Kuik, Onno & Hofkes, Marjan, 2010. "Border adjustment for European emissions trading: Competitiveness and carbon leakage," Energy Policy, Elsevier, vol. 38(4), pages 1741-1748, April.
- Monjon, Stéphanie & Quirion, Philippe, 2010.
"How to design a border adjustment for the European Union Emissions Trading System?,"
Elsevier, vol. 38(9), pages 5199-5207, September.
- Monjon, Stéphanie & Quirion, Philippe, 2010. "How to design a border adjustment for the European Union Emissions Trading System ?," Economics Papers from University Paris Dauphine 123456789/7348, Paris Dauphine University.
- Stéphanie Monjon & Philippe Quirion, 2010. "How to Design a Border Adjustment for the European Union Emissions Trading System?," Working Papers 2010.36, Fondazione Eni Enrico Mattei.
- Philippe Quirion, 2009. "Historic versus output-based allocation of GHG tradable allowances: a comparison," Climate Policy, Taylor & Francis Journals, vol. 9(6), pages 575-592, November.
- Anger, Niels & Alexeeva-Talebi, Victoria & Löschel, Andreas, 2008. "Alleviating Adverse Implications of EU Climate Policy on Competitiveness: The Case for Border Tax Adjustments or the Clean Development Mechanism?," ZEW Discussion Papers 08-095, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Renaud Crassous, Jean-Charles Hourcade, Olivier Sassi, 2006. "Endogenous Structural Change and Climate Targets Modeling Experiments with Imaclim-R," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 259-276.
- Ho, Mun S. & Morgenstern, Richard & Shih, Jhih-Shyang, 2008. "Impact of Carbon Price Policies on U.S. Industry," Discussion Papers dp-08-37, Resources For the Future.
- Oikonomou, Vlasis & Patel, Martin & Worrell, Ernst, 2006. "Climate policy: Bucket or drainer?," Energy Policy, Elsevier, vol. 34(18), pages 3656-3668, December.
- Fischer, Carolyn & Fox, Alan K., 2009. "Combining Rebates with Carbon Taxes: Optimal Strategies for Coping with Emissions Leakage and Tax Interactions," Discussion Papers dp-09-12, Resources For the Future.
- Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
- Philippe Quirion & Damien Demailly, 2006. "Leakage from climate policies and border tax adjustment:lessons from a geographic model of the cement industry," CIRED Working Papers halshs-00009337, HAL.
- Demailly, Damien & Quirion, Philippe, 2008. "European Emission Trading Scheme and competitiveness: A case study on the iron and steel industry," Energy Economics, Elsevier, vol. 30(4), pages 2009-2027, July.
- Löschel, Andreas & Alexeeva-Talebi, Victoria & Mennel, Tim, 2008. "Climate Policy and the Problem of Competitiveness: Border Tax Adjustments or Integrated Emission Trading?," ZEW Discussion Papers 08-061, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Murphy, Rose & Rivers, Nic & Jaccard, Mark, 2007. "Hybrid modeling of industrial energy consumption and greenhouse gas emissions with an application to Canada," Energy Economics, Elsevier, vol. 29(4), pages 826-846, July.
- Bernard, Alain L. & Fischer, Carolyn & Fox, Alan K., 2007. "Is there a rationale for output-based rebating of environmental levies?," Resource and Energy Economics, Elsevier, vol. 29(2), pages 83-101, May.
- Felder Stefan & Rutherford Thomas F., 1993. "Unilateral CO2 Reductions and Carbon Leakage: The Consequences of International Trade in Oil and Basic Materials," Journal of Environmental Economics and Management, Elsevier, vol. 25(2), pages 162-176, September.
- Keith Head & John Ries, 2001. "Increasing Returns versus National Product Differentiation as an Explanation for the Pattern of U.S.-Canada Trade," American Economic Review, American Economic Association, vol. 91(4), pages 858-876, September.
- A. Denny Ellerman, 2008. "New Entrant and Closure Provisions: How do they Distort?," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 63-76.
- Stefan P. Schleicher & Claudia Kettner & Angela Köppl & Gregor Thenius, 2007. "Stringency and Distribution in the EU Emissions Trading Scheme –The 2005 Evidence," Working Papers 2007.22, Fondazione Eni Enrico Mattei.
- Peterson, Everett B. & Schleich, Joachim, 2007. "Economic and environmental effects of border tax adjustments," Working Papers "Sustainability and Innovation" S1/2007, Fraunhofer Institute for Systems and Innovation Research (ISI).
- Paul Veenendaal & Ton Manders, 2008. "Border tax adjustment and the EU-ETS, a quantitative assessment," CPB Document 171, CPB Netherlands Bureau for Economic Policy Analysis.
- Damien Demailly & Philippe Quirion, 2008. "Concilier compétitivité industrielle et politique climatique. Faut-il distribuer les quotas de CO2 en fonction de la production ou bien les ajuster aux frontières ?," Revue économique, Presses de Sciences-Po, vol. 59(3), pages 497-504.
- Fischer, Carolyn, 2001. "Rebating Environmental Policy Revenues: Output-Based Allocations and Tradable Performance Standards," Discussion Papers dp-01-22, Resources For the Future.
- Roland Ismer & Karsten Neuhoff, 2007. "Border tax adjustment: a feasible way to support stringent emission trading," European Journal of Law and Economics, Springer, vol. 24(2), pages 137-164, October.
When requesting a correction, please mention this item's handle: RePEc:eee:ecolec:v:70:y:2011:i:11:p:1957-1971. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.