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Smart hedging against carbon leakage

Author

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  • Böhringer, Christoph

    (University of Oldenburg, Oldenburg / Germany)

  • Rosendahl, Knut Einar

    (School of Economics and Business, Norwegian University of Life Sciences)

  • Briseid Storrøsten, Halvor

    (Statistics Norway, Oslo / Norway)

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 adjustment is a secondbest instrument, and more cost-effective than output-based rebating, in which case domestic output is indirectly subsidized. No country has so far imposed border carbon adjustment, while variants of output-based rebating have been implemented. In this paper we show that combining output-based rebating for emission-intensive and trade-exposed goods with a consumption tax on the same goods can be equivalent with border carbon adjustment. Moreover, we demonstrate that it is welfare improving for a region which has already implemented emission pricing along with output-based rebating to also introduce such a consumption tax. We conclude that supplementing output-based rebating with a consumption tax constitutes smart hedging against carbon leakage: Compared to output-based rebating stand-alone it constitutes a robust strategy for improving cost-effectiveness of unilateral climate policy; compared to border carbon adjustment it limits the risks of potentially detrimental trade disputes.

Suggested Citation

  • Böhringer, Christoph & Rosendahl, Knut Einar & Briseid Storrøsten, Halvor, 2015. "Smart hedging against carbon leakage," Working Paper Series 14-2015, Norwegian University of Life Sciences, School of Economics and Business.
    • Handle: RePEc:hhs:nlsseb:2015_014
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    4. Bellora, Cecilia, 2020. "Carbon Border Adjustment and Alternatives," Conference papers 333210, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.

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    More about this item

    Keywords

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

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • 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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