The Economics of Carbon Leakage Mitigation Policies
Copyright policy )The Economics of Carbon Leakage Mitigation Policies
In a trade model with endogenous emissions abatement, we investigate the impact of three policy instruments aimed at mitigating carbon leakage: free emission allowances, a Carbon Border Adjustment Mechanism (CBAM), and a CBAM with export rebates. We show that providing free allowances does not alter the incentives to abate carbon emissions, but, instead fosters the entry of more carbon intensive producers. This “levels the playing field” both domestically and internationally, and may even reverse carbon leakage. In contrast, a CBAM only levels the playing field domestically, and may lead to an autarky equilibrium. To reverse carbon leakage, a CBAM must be complemented with export rebates. We further show that a CBAM and export rebates improve welfare for any carbon price, and we identify the optimal share of free allowances with or without a CBAM. Finally, we perform a calibration exercise on cement and steel sectors to simulate the effects of the CBAM recently adopted by the European Union. Our model predicts a scenario with reverse carbon leakage and significant welfare gains for both sectors.
- National Research Institute for Agriculture, Food and Environment France
- University Federico II of Naples Italy
- School for Advanced Studies in the Social Sciences France
- UNIVERSITE FEDERALE DE TOULOUSE MIDI-PYRENEES France
- Département Sciences sociales, agriculture et alimentation, espace et environnement France
330, JEL: Q - Agricultural and Natural Resource Economics • Environmental and Ecological Economics/Q.Q5 - Environmental Economics/Q.Q5.Q52 - Pollution Control Adoption and Costs • Distributional Effects • Employment Effects, JEL: H - Public Economics/H.H2 - Taxation, [SDE.ES] Environmental Sciences/Environment and Society, Trade, Export rebates, JEL: F - International Economics/F.F1 - Trade/F.F1.F18 - Trade and Environment, [SDE.ES]Environmental Sciences/Environment and Society, [SHS.ECO] Humanities and Social Sciences/Economics and Finance, JEL: Q - Agricultural and Natural Resource Economics • Environmental and Ecological Economics/Q.Q5 - Environmental Economics/Q.Q5.Q58 - Government Policy, B- ECONOMIE ET FINANCE, Subsidies, [QFIN]Quantitative Finance [q-fin], CBAM, Carbon leakage, [SHS.ECO]Humanities and Social Sciences/Economics and Finance, JEL: Q - Agricultural and Natural Resource Economics • Environmental and Ecological Economics/Q.Q5 - Environmental Economics/Q.Q5.Q54 - Climate • Natural Disasters and Their Management • Global Warming, Carbon pricing, Free allowances, JEL: F - International Economics/F.F1 - Trade/F.F1.F13 - Trade Policy • International Trade Organizations, and Revenue/H.H2.H23 - Externalities • Redistributive Effects • Environmental Taxes and Subsidies
330, JEL: Q - Agricultural and Natural Resource Economics • Environmental and Ecological Economics/Q.Q5 - Environmental Economics/Q.Q5.Q52 - Pollution Control Adoption and Costs • Distributional Effects • Employment Effects, JEL: H - Public Economics/H.H2 - Taxation, [SDE.ES] Environmental Sciences/Environment and Society, Trade, Export rebates, JEL: F - International Economics/F.F1 - Trade/F.F1.F18 - Trade and Environment, [SDE.ES]Environmental Sciences/Environment and Society, [SHS.ECO] Humanities and Social Sciences/Economics and Finance, JEL: Q - Agricultural and Natural Resource Economics • Environmental and Ecological Economics/Q.Q5 - Environmental Economics/Q.Q5.Q58 - Government Policy, B- ECONOMIE ET FINANCE, Subsidies, [QFIN]Quantitative Finance [q-fin], CBAM, Carbon leakage, [SHS.ECO]Humanities and Social Sciences/Economics and Finance, JEL: Q - Agricultural and Natural Resource Economics • Environmental and Ecological Economics/Q.Q5 - Environmental Economics/Q.Q5.Q54 - Climate • Natural Disasters and Their Management • Global Warming, Carbon pricing, Free allowances, JEL: F - International Economics/F.F1 - Trade/F.F1.F13 - Trade Policy • International Trade Organizations, and Revenue/H.H2.H23 - Externalities • Redistributive Effects • Environmental Taxes and Subsidies
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