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Solving the clinker dilemma with hybrid output-based allocation

Author

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  • Frédéric Branger

    (CIRED
    AgroParistech ENGREF)

  • Misato Sato

    (Centre for Climate Change Economics and Policy
    Grantham Research Institute on Climate Change and the Environment)

Abstract

Output-based allocation (OBA) is one of the main options discussed for addressing carbon leakage in emissions trading systems. This paper studies how different OBA designs affect incentives on mitigation and trade in the cement sector. To do so, we develop an analytical model of sector emissions as a function of technical parameters representing abatement levers. We propose a specific design called hybrid OBA, and show that unlike the alternatives, it provides incentives for firms to reduce the carbon intensity of production without offshoring production. We assess the feasibility of hybrid OBA through expert interviews and find that the main barriers identified, including technical and administrative complexities, are manageable. However, hybrid OBA represents a mid-term solution until more robust anti-leakage measures can be introduced, because of two key limitations of OBA in general - it does not provide incentives to reduce the consumption of cement or to accelerate the development of radical low-carbon technologies, both of which are necessary to deliver deep decarbonisation.

Suggested Citation

  • Frédéric Branger & Misato Sato, 2017. "Solving the clinker dilemma with hybrid output-based allocation," Climatic Change, Springer, vol. 140(3), pages 483-501, February.
  • Handle: RePEc:spr:climat:v:140:y:2017:i:3:d:10.1007_s10584-016-1884-x
    DOI: 10.1007/s10584-016-1884-x
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    Cited by:

    1. Philippe Quirion, 2022. "Output-based allocation and output-based rebates: a survey," Chapters, in: Handbook on Trade Policy and Climate Change, chapter 7, pages 94-107, Edward Elgar Publishing.
    2. Miria A. Pigato, 2019. "Fiscal Policies for Development and Climate Action," World Bank Publications - Books, The World Bank Group, number 31051.
    3. Misato Sato, Karsten Neuhoff, Vera Zipperer, 2017. "Benchmarks for emissions trading – general principles for emissions scope," GRI Working Papers 321, Grantham Research Institute on Climate Change and the Environment.
    4. Sato, Misato & Rafaty, Ryan & Calel, Raphael & Grubb, Michael, 2022. "Allocation, allocation, allocation! The political economy of the development of the European Union Emissions Trading System," LSE Research Online Documents on Economics 115431, London School of Economics and Political Science, LSE Library.
    5. Stefan Vögele & Dirk Rübbelke & Kristina Govorukha & Matthias Grajewski, 2020. "Socio-technical scenarios for energy-intensive industries: the future of steel production in Germany," Climatic Change, Springer, vol. 162(4), pages 1763-1778, October.
    6. Sean Healy & Katja Schumacher & Wolfgang Eichhammer, 2018. "Analysis of Carbon Leakage under Phase III of the EU Emissions Trading System: Trading Patterns in the Cement and Aluminium Sectors," Energies, MDPI, vol. 11(5), pages 1-25, May.

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    More about this item

    Keywords

    Carbon Price; Carbon Intensity; Emission Trade System; Carbon Leakage; Carbon Cost;
    All these keywords.

    JEL classification:

    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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