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

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

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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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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  1. Jean-Marc Burniaux & Jean Château, 2008. "An Overview of the OECD ENV-Linkages Model," OECD Economics Department Working Papers 653, OECD Publishing.
  2. 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.
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  4. Rob Dellink & Stéphanie Jamet & Jean Château & Romain Duval, 2010. "Towards Global Carbon Pricing: Direct and Indirect Linking of Carbon Markets," OECD Environment Working Papers 20, OECD Publishing.
  5. Aaditya Mattoo & Arvind Subramanian & Dominique van der Mensbrugghe & Jianwu He, 2009. "Reconciling Climate Change and Trade Policy," Working Paper Series WP09-15, Peterson Institute for International Economics.
  6. Philippe Quirion & Damien Demailly, 2006. "CO2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: grandfathering versus output-based allocation," Post-Print hal-00119449, HAL.
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  8. Jean-Marc Burniaux & Jean Chateau & Romain Duval, 2013. "Is there a case for carbon-based border tax adjustment? An applied general equilibrium analysis," Applied Economics, Taylor & Francis Journals, vol. 45(16), pages 2231-2240, June.
  9. Winchester Niven & Paltsev Sergey & Reilly John M, 2011. "Will Border Carbon Adjustments Work?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-29, January.
  10. Babiker, Mustafa H., 2005. "Climate change policy, market structure, and carbon leakage," Journal of International Economics, Elsevier, vol. 65(2), pages 421-445, March.
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  13. 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.
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