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Understanding Overlapping Policies: Internal Carbon Leakage and the Punctured Waterbed

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Listed:
  • Grischa Perino
  • Robert A. Ritz
  • Arthur van Benthem

Abstract

We present an integrated framework to understand the emissions impact of unilateral overlapping policies within a carbon-pricing system. "Internal carbon leakage" captures emissions displacement within the system (e.g., due to greater product imports from a neighbouring country). The waterbed effect captures the policy's interaction with the system's overall emissions cap. Current market rules in the reformed EU ETS, California's carbon market and RGGI feature "punctured" waterbeds that allow overlapping policies to affect aggregate emissions. We present simple formulae to estimate internal carbon leakage for different types of policy such as a carbon price floor (perhaps with a border tax adjustment), an energy efficiency program, and renewables support. The sign and magnitude of the climate benefit from an overlapping policy varies widely depending on its design, location and timing. Punctured waterbeds raise the stakes: well-designed overlapping policies can be much more climate-effective but others now backfire.

Suggested Citation

  • Grischa Perino & Robert A. Ritz & Arthur van Benthem, 2019. "Understanding Overlapping Policies: Internal Carbon Leakage and the Punctured Waterbed," NBER Working Papers 25643, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25643
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    1. repec:aen:journl:ej40-1-ritz is not listed on IDEAS
    2. repec:eee:jeeman:v:87:y:2018:i:c:p:1-23 is not listed on IDEAS
    3. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
    4. repec:eee:pubeco:v:169:y:2019:i:c:p:172-202 is not listed on IDEAS
    5. repec:eee:jeeman:v:83:y:2017:i:c:p:197-216 is not listed on IDEAS
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    Cited by:

    1. Edenhofer, Ottmar & Flachsland, Christian & Kalkuhl, Matthias & Knopf, Brigitte & Pahle, Michael, 2019. "Optionen für eine CO2-Preisreform," Working Papers 04/2019, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    2. Stavins, Robert N., 2019. "The Future of U.S. Carbon-Pricing Policy: Normative Assessment and Positive Prognosis," Working Paper Series rwp19-017, Harvard University, John F. Kennedy School of Government.
    3. Robert N. Stavins, 2019. "The Future of U.S. Carbon-Pricing Policy," NBER Chapters, in: Environmental and Energy Policy and the Economy, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • 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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