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Smart Hedging Against Carbon Leakage

Author

Listed:
  • Christoph Böhringer
  • Knut Einar Rosendahl
  • Halvor Briseid Storrøsten

Abstract

Policy makers in the EU and elsewhere are concerned that unilateral carbon pricing induces carbon leakage through relocation of emission-intensive and trade-exposed industries to other regions. A common measure to mitigate such leakage is to combine an emission trading system (ETS) with output-based allocation (OBA) of allowances to exposed industries. We first show analytically that in a situation with an ETS combined with OBA, it is optimal to impose a consumption tax on the goods that are entitled to OBA, where the tax is equivalent in value to the OBA-rate. Then, using a multi-region, multi-sector computable general equilibrium (CGE) model calibrated to empirical data, we quantify the welfare gains for the EU to impose such a consumption tax on top of its existing ETS with OBA. We run Monte Carlo simulations to account for uncertain leakage exposure of goods entitled to OBA. The consumption tax increases welfare whether the goods are highly exposed to leakage or not, and can hence be regarded as smart hedging against carbon leakage.

Suggested Citation

  • Christoph Böhringer & Knut Einar Rosendahl & Halvor Briseid Storrøsten, 2019. "Smart Hedging Against Carbon Leakage," CESifo Working Paper Series 7915, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_7915
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    More about this item

    Keywords

    carbon leakage; output-based allocation; consumption tax;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • F18 - International Economics - - Trade - - - Trade and Environment
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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