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Mitigating Carbon Leakage: Combining Output-Based Rebating with a Consumption Tax

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  • Christoph Böhringer
  • Knut Einar Rosendahl
  • Halvor Briseid Storrøsten

Abstract

Unilateral climate policy induces carbon leakage through the relocation of emission-intensive and trade-exposed industries to regions with no or more lenient emission regulation. Both analytical and numerical studies suggest that emission pricing combined with border carbon adjustments may be a second-best instrument, and more cost-effective than output-based rebating, in which case domestic output is indirectly subsidized. No countries have so far imposed border carbon adjustments, while variants of output-based rebating have been implemented. In this paper we demonstrate that it is welfare improving for a region who has already implemented emission pricing along with output-based rebating for emission-intensive and trade-exposed goods to also introduce a consumption tax on these goods. Moreover, we show that combining output-based rebating with a consumption tax can be equivalent with border carbon adjustments.

Suggested Citation

  • Christoph Böhringer & Knut Einar Rosendahl & Halvor Briseid Storrøsten, 2015. "Mitigating Carbon Leakage: Combining Output-Based Rebating with a Consumption Tax," CESifo Working Paper Series 5459, CESifo.
    • Handle: RePEc:ces:ceswps:_5459
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    More about this item

    Keywords

    carbon leakage; output-based rebating; border carbon adjustments; consumption tax;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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