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Land Competitiveness and Leakage Concerns and Border Carbon Adjustments
Abstract
This paper provides a review of the literature on competitiveness and leakage concerns associated with differentiated climate abatement commitments among countries. The literature reviewed is not exhausted, but it is sufficient to provide a balanced view of both academics and policy circles. Section 2 discusses how to identify the sectors at a risk of carbon leakage. Section 3 examines ex ante estimates of potential carbon leakage rates, and explains why they differ from ex post results of environmental tax reforms and greenhouse gas emissions trading schemes that have been implemented in the European Union. Section 4 discusses broad policy options to address competitiveness and leakage concerns, and compares which anti-leakage policy, border adjustments or output-based allocation, is more effective to limiting carbon leakages or mitigating production loss in the sectors affected. Given that border carbon adjustment measures are incorporated in the U.S. proposed congressional climate bills to level the carbon playing field and could have potential conflicts with World Trade Organization (WTO) provisions and practical difficulties associated with their implementation, Section 5 discuses in great detail the WTO consistency, the effectiveness and methodological challenges of border carbon adjustment measures. The paper ends with some concluding remarks.
... However, it may result in increased production and thus higher emissions in other countries, both within and outside the EU, particularly if the emissions per unit of product (emission intensities) are relatively higher in these countries. This emissions leakage (Markusen 1975;Zhang 2012) could limit or even reverse the positive impact on global warming that could come from removing VCS in the EU. Does the risk of emissions leakage justify the existence of VCS if GHG emission intensities are lower in the EU than in other countries? ...
... This implies that a policy effective at reaching regional climate objectives (e.g., reducing GHG in the EU) may not be the best way to reduce global emissions. Reviewing the literature on carbon leakage, Zhang (2012) found that most models predict significant leakage effects, though mostly well short of 100%. When comparing ex-ante to ex-post results, they found that the predicted leakage was difficult to verify empirically, suggesting that models tend to overestimate leakage. ...
... This in turn provides incentives to increase production outside the EU. In other words, part of the EU's ruminant production and associated emissions would reallocate abroad, causing emission leakage, as discussed by Markusen (1975) and Zhang (2012). This emissions leakage might be expected to offset emissions reductions obtained in the EU, or even lead to an increase in total global emissions. ...
Subsidizing polluting industries generally leads to increased pollution locally. However, given the diversity of production technologies across countries and international trade, the global impact of unilateral policies is not a priori clear. We use the agricultural sector model CAPRI to simulate the impact of removing the voluntary coupled support for ruminants, presently permitted under the EU Common Agricultural Policy. We find that this reduces greenhouse gas emissions in the EU. However, emissions leakage significantly diminishes the global mitigation effect since about 3/4 of the reduction in the EU is offset by increased emissions in the rest of the world.
... However, because of the negative perspective of international climate negotiations, this option seems highly unlikely until at least 2020 3 . A pragmatic alternative would then be to embrace cooperative sectoral approaches (Houser, 2008;Zhang, 2012 ...
... The most controversial aspect of this measure is its compatibility with the WTO, which has led to extensive literature on the subject (Biermann and Brohm, 2004;Goh, 2004;Frankell, 2005;De Cendra, 2006;Bhagwati and Mavroidis, 2007;van Asselt and Biermann, 2007;Ismer et al., 2007;Pauwelyn, 2007;Green and Epps, 2008;Sindico, 2008;Quick, 2008;Bordoff, 2009;Low et al., 2011;Zhang, 2012). If there is a consensus among legal experts, it is that all the technical points discussed above are key for BCA's WTO consistency. ...
... If there is a consensus among legal experts, it is that all the technical points discussed above are key for BCA's WTO consistency. The shrimp-turtle case teaches us that the exception regime of the WTO can rule, that this institution takes seriously into account the attempt to conclude international agreements before implementing trade measures (Tamiotti, 2011), and that flexibility was the cornerstone of WTO dispute panel decisions (Zhang, 2012). However the degree of legal complexity of BCA is far beyond a simple ban on shrimps. ...
... When the policy-implementing region is large, then its policies could affect global demand for polluting resources (say, oil), which would lower the world price of those resources, causing an increase in their consumption abroad, a second mechanism of leakage. The second mechanism is believed to dominate the first (Zhang, 2012). Quantitative estimates of leakage, which are almost entirely based on simulations of CGE models, are predicted to be 5% to 25% although particular economic sectors might be subject to large leakages (Harstad, 2012). ...
... The focus in this literature is largely emissions from industrial activities. The main policies suggested for mitigating competitive effects are border adjustment policies such as import tariffs and subsidies for home producers (Fischer & Salant, 2012; Zhang, 2012). While such policies may mitigate competitive effects and emissions leakage, they increase the social cost of achieving a given emissions target. ...
This article addresses the question of what an individual jurisdiction (or a group of jurisdictions) could do to mitigate the leakage of GHG emissions that results from its (their) own regulation aimed at reducing such emissions. A novel aspect of this work is that it is focused on methods other than those involving the pursuit of environmental agreements with other jurisdictions to reduce leakage. In other words, the focus is on unilateral measures to reduce such leakage. A number of different approaches including the proper selection of the type of policy instrument and policy ramp up, improved targeting of polluting activities, targeting lifecycle emissions and adoption of additional leakage-specific policies that complement the main policy have been suggested in specific yet different policy arenas. There does not, however, appear to be an understanding of the common and distinct features of the different types of responses and the multiple approaches that might be appropriate in any specific policy context. To this end, this article synthesizes and differentiates the different approaches based on whether leakage is being mitigated ex ante or in media res and at the national or provincial level, on the tangibility of policy makers’ efforts to control leakage, on the level of burden placed on regulated polluters, and on the required level of precision in the estimates of leakage.
Policy relevance
This article provides a consolidated summary of a diverse literature on the different ways in which policy makers can address the problem of the leakage of GHG benefits under unilateral policies. A salient aspect of this article is that it focuses on unilateral responses to leakage that are complementary to the pursuit of environmental agreements with other jurisdictions. It identifies the different types of response that might be appropriate under different settings.
... When the policy-implementing region is large, then its policies could affect global demand for polluting resources (say, oil), which would lower the world price of those resources, causing an increase in their consumption abroad, a second mechanism of leakage. The second mechanism is believed to dominate the first (Zhang, 2012). Quantitative estimates of leakage, which are almost entirely based on simulations of CGE models, are predicted to be 5% to 25% although particular economic sectors might be subject to large leakages (Harstad, 2012). ...
... The focus in this literature is largely emissions from industrial activities. The main policies suggested for mitigating competitive effects are border adjustment policies such as import tariffs and subsidies for home producers (Fischer & Salant, 2012; Zhang, 2012). While such policies may mitigate competitive effects and emissions leakage, they increase the social cost of achieving a given emissions target. ...
A reason for much pessimism about the environmental benefits of todays biofuels, essentially corn and sugarcane ethanol, is the so-called indirect land use change (ILUC) emissions associated with expanding biofuel production. While there exist several simulation-based estimates of indirect emissions, the empirical basis underlying key input parameters to such simulations is not beyond doubt while empirical verification of indirect emissions is hard. Regardless, regulators have adopted global warming intensity ratings for biofuels based on those simulations and in some case are holding regulated firms accountable for (some forms of) leakage. Suffice to say that both the estimates of and the approach to regulating leakage are controversial. The objective of this paper is therefore to review a wider economic in order to identify a broader set of policy options for mitigating emissions leakage. We find that controlling leakage by affixing responsibility to regulated firms lacks support in the broader literature, which emphasizes alternative approaches.This article is protected by copyright. All rights reserved.
... As shown in Figure 1, the evolution of the carbon price was highly variable. Largely superior to previous forecasts between May 2005 and April 2006, the EUA price during phase I (in green) collapsed when it was realised that emissions Figure 1: Price of EUA on the EU-ETS (e/tCO2), 20032012. Source: Trotignon in 2005(and 2006) were (or were going to be) inferior to analysts' forecasts and to the global number of allowances in the market. ...
... The intense lobbying deployed by EITE sectors allowed them to obtain some concessions from the Commission: the final version of the directive is more favourable towards them than earlier drafts, both in the categorisation of the sectors at risk and in the allocation rules. For example, the inclusion of the third criterion added 117 sectors (increasing to 146 the sectors at risk of leakage out of 258 in the EU-ETS, see (Zhang, 2012)), and increased up to 53% the number of free allowances in the manufacturing industry (Clò, 2010) . The third criterion is the most controversial, as the exposure to international competition without high carbon costs does not constitute a good vulnerability indicator (Martin et al., 2012). ...
The European Union Emissions Trading System (EU-ETS), presented as the ``flagship'' of European
climate policy, is subject to many criticisms from different stakeholders.
Criticisms include the insufficient carbon emissions reduction, the competitiveness losses and the
induced carbon leakages, the unfair distributional effects, the frauds and the existence of several other
overlapping climate policy instruments. We review these criticisms and find the EU-ETS brought small
but real abatements. The competitiveness losses and carbon leakages do not seem to have occurred.
The distributional effects have indeed been unfair and fraud has been important. Finally, the scheme
does not justify abandoning other climate policies. Some of these problems could have been avoided
and can still be corrected by rethinking flexibility mechanisms and by adding some control over the
carbon price.
... It also provides a perspective from which we can evaluate the emission reduction efficiency of different CCER projects. The concept of carbon leakage originated from unilateral emission reduction regulations and has always been a hot topic in terms of carbon trading markets (see a review done by Zhang 2012). For voluntary greenhouse emission reduction projects, carbon leakage refers to an increase in emissions outside the project boundary which is measurable and attributable to the project itself (Watson et al. 2000). ...
The topic of climate change has aroused increasingly widespread concern around the world. Under the agreement at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change (UNFCCC), covened in Paris, France (Paris Agreement), which requires all Parties to undertake emission reductions, the developing countries who were once exempted from emission reduction obligations are now becoming more and more important. This study focuses on mitigation actions in China, the largest carbon emitter, as well as the largest developing country in the world. Specifically, we examine Chinese Certified Emission Reduction (CCER) projects. The objective is to compare the reduction efficiency of three types of projects: simple abatement and completely renewable energy alternative projects at the supply side and demand side projects. From market-induced carbon leakage point of view, a dual market equilibrium model was built, with results showing that the key factors affecting the leakage rates are price elasticities of both demand and supply sides and market share parameters. In most cases, renewable energy alternative projects show the least leakage rate while demand side projects show the highest. Sensitivity analysis finds that leakage rates for the three types of projects are more sensitive to price elasticity parameters than market share parameters. Moreover, factors (electricity price elasticity of coal demand from coal-fired generation) and (electricity price elasticity of electricity demand) affect not only the leakage rate of each project but also the comparative results between them. Although our study is based on China, the theoretical analysis is applicable in other regional voluntary emission reduction markets around the world. So, a systematic approach to comprehensively analyze the issue is summarized, based on which, we recommend two mitigation strategies to cope with the issue in offset projects in order to give managerial insights for the government. Firstly, the calculated leakage rates for different types of projects provide a new perspective to evaluate various offset projects, thus helping consider project types for priority validation. Secondly, we suggest to establish an accurate and classified discount coefficient system according to the project types to deal with the issue; the sensitivity analysis is helpful to find the most influential factors. A top-down approach to implement the strategy is proposed.
... Additionally, carbon leakage may derive from policy instruments implemented at different levels (e.g. between the federal and state climate efforts). See, e.g., Goulder and Stavins (2011);Zhang (2012). 2. Potential linking challenges that may cast the linkage into uncertainty include, inter alia, differences in the ETS designs (e.g. ...
Carbon leakage is central to the discussion on how to mitigate climate change. The current carbon leakage literature focuses largely on industrial production, and less attention has been given to carbon leakage from the electricity sector (the largest source of carbon emissions in China). Moreover, very few studies have examined in detail electricity regulation in the Chinese national emissions trading system (which leads, for example, to double counting) or addressed its implications for potential linkage between the EU and Chinese emissions trading systems (ETSs). This article seeks to fill this gap by analysing the problem of ‘carbon leakage’ from the electricity sector under the China ETS. Specifically, a Law & Economics approach is applied to scrutinize legal documents on electricity/carbon regulation and examine the economic incentive structures of stakeholders in the inter-/intra-regional electricity markets. Two forms of ‘electricity carbon leakage’ are identified and further supported by legal evidence and practical cases. Moreover, the article assesses the environmental and economic implications for the EU of potential linkage between the world’s two largest ETSs. In response, policy suggestions are proposed to address electricity carbon leakage, differentiating leakage according to its sources.
Key policy insights
• Electricity carbon leakage in China remains a serious issue that has yet to receive sufficient attention.
• Such leakage arises from the current electricity/carbon regulatory framework in China and jeopardizes mitigation efforts.
• With the US retreat on climate efforts, evidence suggests that EU officials are looking to China and expect an expanded carbon market to reinforce EU global climate leadership.
• Given that the Chinese ETS will be twice the size of the EU ETS, a small amount of carbon leakage in China could have significant repercussions. Electricity carbon leakage should thus be considered in any future EU–China linking negotiations.
... The WTO was created in order to promote free trade by prohibiting unjustified protectionism or discrimination. The compatibility of border carbon adjustments, a prominent anti-leakage policy, with the WTO has led to an extensive literature without any consensus on the subject (Ismer and Neuhoff, 2007;Zhang, 2012;Low et al., 2011). The majority of authors argue that BCAs would violate the general principle of WTO, however whether or not they could fall under the exception regime (Article XX) is a much debated question. ...
Output-based allocation (OBA) is one of the main options discussed for address- ing carbon leakage in emissions trading systems. This paper studies how different OBA designs affect incentives on mitigation and trade in the cement sector. To do so, we develop an analytical model of sector emissions as a function of technical parameters representing abatement levers. We propose a specific design called hybrid OBA, and show that unlike the alternatives, it provides incentives for firms to reduce the carbon intensity of produc- tion without offshoring production. We assess the feasibility of hybrid OBA through expert interviews and find that the main barriers identified, including technical and administrative complexities, are manageable. However, hybrid OBA represents a mid-term solution until more robust anti-leakage measures can be introduced, because of two key limitations of OBA in general - it does not provide incentives to reduce the consumption of cement or to accelerate the development of radical low-carbon technologies, both of which are necessary to deliver deep decarbonisation.
... Also, in contrast to the EU ETS, indirect emissions from both electricity generation within the pilot region and emissions generated from imported electricity from outside the pilot region are covered in all the pilot schemes. 2 While it would be ideal to include all indirect emissions, in practice, all the pilot regions only cover the indirect emissions released in generating the amount of imported electricity simply because it is straightforward to measure the level of electricity generation (). Given concerns about potential carbon leakage as a result of ETSs being initially operated only in a few pilot regions (equal to the ratio of S106 Zhang CLIMATE POLICY the increase in CO 2 emissions outside the pilot regions to the reduction in emissions within these pilot regions relative to their reference levels; Zhang, 2012), this design feature could help to reduce this leakage in two ways. The first is to cut carbon leakage from the increased electricity imports if no indirect emissions are covered. ...
The Chinese central government has approved seven pilot carbon trading schemes. These pilot regions have been deliberately selected to be at varying stages of development and are given considerable leeway to design their own schemes. These schemes have features in common, but vary considerably in their approach to issues such as the coverage of sectors, allocation of allowances, price uncertainty and market stabilisation, potential market power of dominated players, use of offsets, and enforcement and compliance. Our study finds that educating the covered entities, strictly enforcing compliance rules, ascribing allowances as financial assets and defining their valid duration, and including non-compliance in the credit record of non-complying entities are crucial to enabling active participation in carbon emissions trading. Moreover, the retrospective examination of the carbon trading pilots suggests that a national emissions trading scheme (ETS) should at least be based on uniform standards for measuring, reporting, and verification, the allocation of allowances, and the rules of compliance. Until a nationwide carbon market becomes fully functional after 2019, regional ETSs continue to function in parallel but those entities covered in the existing regional ETSs will be unconditionally integrated into a nationwide ETS if they meet the latter's threshold. Policy relevance The purpose of launching the seven carbon trading schemes and the reason why these seven pilot regions are given considerable leeway to design their own schemes are to enable China to develop a nationwide ETS with expanding geographical coverage and sectoral scope to complement the administrative means on which China, to date, has predominantly relied to achieve its increasingly stringent energy-saving and carbon intensity goals. This article discusses the lessons that carbon trading pilots have learned either from their own practice or other pilots in the first compliance year, as well as the good practice that the to-be-established national scheme could follow, and discusses the potential pathways for the evolution of regional pilot carbon trading schemes into a nationwide carbon trading scheme. Insights into the design, implementation, and compliance of China's carbon trading pilots and potential pathways help make these pilots work reliably and effectively and will smooth the transition from the pilots to a national ETS.
... The WTO was created in order to promote free trade by prohibiting unjustified protectionism or discrimination. The compatibility of border carbon adjustments, a prominent anti-leakage policy, with the WTO has led to an extensive literature without any consensus on the subject (Ismer and Neuhoff, 2007;Zhang, 2012;Low et al., 2011). The majority of authors argue that BCAs would violate the general principle of WTO, however whether or not they could fall under the exception regime (Article XX) is a much debated question. ...
This paper proposes an innovative solution to distribute free allowances to the cement sector under emissions trading systems, called hybrid output-based allocation (OBA). We demonstrate that unlike many of the allocation methods currently being used, our design provides incentives which are aligned with the mitigation options available to this sector in the short to medium term. Specifically, it increases the incentive to improve the carbon intensity of clinker production; reduces the incentive to import clinker to avoid carbon costs; increases the incentive to use more low-carbon clinker alternatives to produce cement; and finally it reduces excess allocation and reduces incentives to inflate production volumes to obtain more free allowances. The hybrid OBA does not, however, provide incentives to reduce the consumption of cement or to bring about breakthrough technologies, hence should be considered as a mid-term solution to aid the decarbonization of the cement sector in conjunction with other support mechanisms.
... Many numerical modeling studies quantify carbon leakage, the bulk of them using multi-region and multi-sector CGE models of the world economy. For policy-relevant parameters on key dimensions -such as the stringency of emission regulation or the size of the abatement coalition -most studies conclude that the leakage rate of a unilateral carbon tax (or emissions trading) is in the range of 5-30%, i.e., a reduction of 100 units of CO 2 in the regulating country leads to an increase of 5-30 units of CO 2 in non-regulating countries (see, e.g., the review by Zhang, 2012, and the special issue edited by Böhringer et al., 2012a). There are, however, a few outliers with negative leakage (Elliott and Fullerton, 2014) or leakage rates above 100% (Babiker, 2005), adopting less conventional assumptions on international factor mobility or market power. ...
Unilateral climate policy induces carbon leakage through the relocation of emission-intensive and trade-exposed industries to regions without emission regulation. Previous studies suggest that emission pricing combined with border carbon adjustment is a second-best instrument, and more cost-effective than output-based rebating. We show that the combination of output-based rebating and a consumption tax for emission-intensive and trade-exposed goods can be equivalent with border carbon adjustment. Moreover, it is welfare improving for a region that implements emission pricing along with output-based rebating to introduce such a consumption tax. The welfare gain is particularly large if output-based rebating is already implemented for a sector that is not much exposed to leakage, e.g., due to uncertainty about exposure or due to lobbying activities. Thus, supplementing output-based rebating with a consumption tax constitutes robust policies to mitigate carbon leakage.
... Also, the coalition's efficiency costs of its carbon policies, as well as the competitiveness losses of its emission-intensive industries, decline, while the opposite is true for non-coalition countries. See Branger and Quirion (2014), Böhringer et al. (2012a), and Zhang (2012 for recent overviews. The numerical studies have increased our knowledge of the role of various factors like coalition size, the coverage of the carbon tariffs, and how embodied emissions are calculated. ...
Climate effects of unilateral carbon policies are undermined by carbon leakage. To counteract leakage and increase global cost-effectiveness carbon tariffs can be imposed on the emissions embodied in imports from non-regulating regions. We present a theoretical analysis on the economic incentives for emission abatement of producers subjected to carbon tariffs. We quantify the impacts of different carbon tariff designs by an empirically based multi-sector, multi-region CGE model of the global economy. We find that firm-targeted tariffs can deliver much stronger leakage reduction and higher efficiency gains than tariff designs operated at the industry level. In particular, because the exporters are able to reduce their carbon tariffs by adjusting emissions, their competitiveness and the overall welfare of their economies will be less randomly and less adversely affected than in previously studied carbon tariff regimes. This beneficial distributional impact could facilitate a higher degree of legitimacy and legality of carbon tariffs.
... On the sectoral level, a number of case studies assess the impact of carbon pricing in the EU ETS on particular industries. In a review of this literature, Zhang (2012) concludes that "[a]nalysis of cement, iron and steel, aluminum and refinery sectors does not reveal carbon leakage for these trade-exposed carbon intensive sectors during the first phase (2005)(2006)(2007) of the EU ETS" (p. 41). 2 Other empirical studies take a different perspective, asking to what extent increased trade-in contrast to climate policies-has contributed to a geographical shift of polluting industries (e.g., Grossman & Krueger 1991, Antweiler et al. 2001, Levinson 2010. ...
Emission leakage could potentially undermine the effectiveness of unilateral climate policies. Significant emission transfers from developing countries to developed countries in the form of emissions embodied in trade have been interpreted as an indication of such leakage. To reduce leakage and provide an appropriate picture of countries' responsibility for global emissions, an alternative proposal is to attribute emissions on the basis of consumption instead of production. However, as one unit of imported emissions generally cannot be equated with a corresponding increase in emissions released to the atmosphere, putting a price on emissions embodied in imports equal to the social cost of these emissions (e.g., by means of consumption-based emission pricing) is not an optimal policy. Hence, one should consider a broad scope of trade measures to reduce leakage, focusing on a few highly traded, emission-intensive industries. Finally, the optimal policy portfolio to address leakage may also contain free allocation of emission permits and sectoral approaches.
... Carbon leakage is another issue worthy of special attention. Zhang (2012) reviews the literature on international carbon leakage and finds little evidence that the implementation of a carbon tax or an ETS can cause carbon leakage, whereas some other factors, such as physical and human capital, labor supply, transportation costs and business environment are more important for business strategy. However, there ...
... Ex ante modeling are dominated by computable general equilibrium (CGE) models but there are also some sectoral partial equilibrium models (Mathiesen and Maestad, 2004;Monjon and Quirion, 2011b). Some literature reviews have been published recently on the subject (Branger and Quirion, 2013;Dröge, 2009;Gerlagh and Kuik, 2007;Quirion, 2010;Zhang, 2012) but to our knowledge no quantitative meta-analysis has been conducted on this topic. ...
The efficiency of unilateral climate policies may be hampered by carbon leakage and competitiveness losses. A widely discussed policy option to reduce leakage and protect competitiveness of heavy industries is to impose border carbon adjustments (BCAs). The estimation of carbon leakage as well as the assessment of different policy options led to a substantial body of literature in energy-economic modeling. In order to give a quantitative overview on the most recent research of the topic, we conduct a meta-analysis on 25 studies, altogether providing 310 estimates of carbon leakage ratio according to different assumptions and models. The typical range of carbon leakage estimates are from 5% to 25% (mean 14%) without policy and from -5% to 15% (mean 6%) with BCAs. A meta-regression analysis is performed to further investigate the impact of different assumptions on the leakage estimates. The decrease of the leakage ratio with the size of the coalition is confirmed and quantified. Among the BCA options, the extension of BCAs to all sectors and the inclusion of export rebates are the most efficient features in the meta-regression model to reduce the leakage ratio. All other parameters being constant, BCAs reduce leakage ratio by 6 percentage points.
... Past WTO cases, such as the Superfund, Tuna-Dolphin, and Shrimp-Turtle reveal some information, but many features of BCA are unprecedented and WTO panels are not bound by previous decisions 124 (no rule of stare decisis). Hence, assessing the WTO consistency of BCA according to its specific features divides legal experts and has led to extensive literature on the subject 7,97,113,[125][126][127][128][129][130][131][132][133][134] . If there is a consensus among legal experts, it is that all the technical points discussed above are key for BCA's WTO consistency. ...
In a world with uneven climate policies, the carbon price differentials across regions could shift the production of energy‐intensive goods from carbon‐constrained countries to ‘carbon havens’, or countries with laxer climate policy. This would reduce the environmental benefits of the policy (carbon leakage) while potentially damaging the economy (competitiveness concerns). A review on these questions is provided in this article. First we discuss the main terms involved, such as carbon leakage, competitiveness, sectors at risk, or climate spillovers. Then we analyze the studies evaluating the carbon leakage risk. Most ex ante modeling studies conclude to leakage rates in the range of 5–20% (if no option to mitigate leakage is implemented), whereas ex post econometric studies have not revealed statistically significant evidence of leakage. Different policy options to face these issues are then examined with an emphasis on Border Carbon Adjustments ( BCA ). BCA consist in reducing the carbon price differentials of the goods traded between countries. Properly implemented, they can reduce leakage (by around 10 percentage points in ex ante modeling studies) in a cost‐effective way but are controversial because they shift a part of the abatement costs from abating countries to nonabating countries. Their impact on international negotiations is unclear: they could encourage third countries to join the abating coalition or trigger a trade war. Besides, their consistency with World Trade Organization ( WTO ) rules is contentious among legal experts. WIREs Clim Change 2014, 5:53–71. doi: 10.1002/wcc.245
This article is categorized under: Climate Economics > Economics of Mitigation
... Ex ante modeling are dominated by Computable General Equilibrium (CGE) (Böhringer et al., 2012a) models but there are also some sectoral partial equilibrium models (Mathiesen and Moestad, 2004; Monjon and Quirion, 2011b). Some litterature reviews have been published recently on the subject (Zhang, 2012; Quirion, 2010; Dröge et al., 2009; Gerlagh and Kuik, 2007) but to our knowledge no quantitative meta-analysis has been made. Meta-analysis is a method developped to provide a summary of empirical results from different studies and test hypotheses regarding the determinants of these estimates (Nelson and Kennedy, 2009). ...
The efficiency of unilateral climate policies may be hampered by carbon leakage and competitiveness
losses. A widely discussed policy option to reduce leakage and protect competitiveness of heavy
industries is to impose Border Carbon Adjustments (BCA) to non regulated countries, which remains
contentious for juridical and political reasons. The estimation of carbon leakage as well as the
assessment of different policy options led to a substantial body of literature in energy-economic
modeling.
In order to give a quantitative overview on the most recent research on the topic, we conduct a meta-
analysis on 25 studies, altogether providing 310 estimates of carbon leakage ratios according to
different assumptions and models. The typical range of carbon leakage ratio estimates are from 5% to
25% (mean 14%) without policy and from -5% to 15% (mean 6%) with BCA. The output change of
Energy Intensive Trade Exposed (EITE) sectors varies from -0.1% to -16% without BCA and from
+2.2% to -15.5% with BCA.
A meta-regression analysis is performed to further investigate the impact of different assumptions on
the leakage ratio estimates. The decrease of the leakage ratio with the size of the coalition and its
increase with the binding target is confirmed and quantified. Providing flexibility reduces leakage ratio,
especially the extension of coverage to all GHG sources. High values of Armington elasticities lead to
higher leakage ratio and among the BCA options; the extension of BCA to all sectors is in the meta-
regression model the most efficient feature to reduce the leakage ratio. Our most robust statistical
finding is that, all other parameters being constant, BCA reduces leakage ratio by 6 percentage points.
A precificação do carbono visa internalizar os custos ambientais das emissões de gases de efeito estufa (GEE) e incentivar a transição para uma economia de baixo carbono. A tributação é um dos principais instrumentos de precificação, impondo um custo direto sobre as emissões. Embora possa estimular adoção de tecnologias mais limpas, ela enfrenta sérios desafios como os impactos regressivos e a fuga de carbono. Para mitigar esses efeitos, os ajustes de fronteira para o carbono (BCAs) garantem que bens importados enfrentem custos ambientais equivalentes. No entanto, eles enfrentam desafios técnicos, jurídicos e econômicos. A sua adoção requer justificativas que se coadunem com as normas do comércio internacional e sejam baseadas em critérios objetivos e transparentes. Tecnologias como blockchain podem ser usadas tanto para melhorar a transparência quanto para auxiliar na identificação e fiscalização de práticas protecionistas. Este estudo analisa os impactos e desafios dessas políticas, destacando que seu sucesso depende da adoção de um modelo regulatório adequado e da cooperação internacional para garantir, ao mesmo tempo, justiça tributária e redução das emissões dos GEE em escala global.
Avoiding the transfer of “carbon” and encouraging the digestion of “carbon” are essential to promote the green and low-carbon transformation of China’s economy. In accordance with the standpoint of off-site subsidiaries, this paper examines the transfer of “carbon” from high-carbon enterprises using the data of A-share listed companies from 2009 to 2018 using a DID approach and the 2013 China carbon emissions trading pilot as a quasi-natural experiment. As demonstrated by the reach findings: (1) Part of the effect of corporate “carbon reduction” is achieved by shifting high-carbon sectors. (2) As demonstrated in mechanism analysis, when high-carbon companies face the dual cost pressure of R&D expenditure and purchasing carbon trading rights, they will establish subsidiaries to avoid the parent company’s pressure to lessen emissions. As revealed in heterogeneity analysis. (3) companies with stronger R&D capabilities and higher success rates are more willing to respond to the impact of carbon trading policies with technological upgrades. Companies with weaker R&D capabilities and higher failure rates are more likely to choose to transfer “carbon” to avoid the “dual cost” of R&D failures. (4) Owing to the constraint of the migration threshold, the trajectory of “carbon” transfer is primarily domestic interregional transfer supplemented by cross-country transfer. (5) Larger enterprises emitting more “carbon”, are not only more likely to pay more “carbon” reduction costs in the face of carbon policy shocks, are but also more likely to shift “carbon”. This study not only provides a new perspective to explain the “carbon” transfer phenomenon in China, but also provides crucial policy implications for further strengthening environmental governance as well as regional joint prevention and control in China.
Despite the increasing challenges of coping with global climate change, current climate policy is still implemented unilaterally at national and subnational levels, with different forms and intensities in both time and space dimensions. Such regionally differentiated climate policies inevitably cause carbon leakage phenomenon, that is, reduced carbon emissions in abating areas may be offset to some extent by increased carbon emissions in non-abating areas. The occurrence of carbon leakage could undermine the environmental effectiveness of implemented climate policies and cause extra emission reduction costs. Studying carbon leakage is vital not only to the effective formulation, implementation, and evaluation of climate policy, but also to the fair sharing of international emission reduction responsibilities. To understand how this important issue has been discussed, this paper systematically reviewed the research shedding light on carbon leakage. Taking the questions of how carbon leakage happens, what are the key influencing factors, how to evaluate it and where does the heterogeneity of results come from as the story line, we investigated the main mechanism of carbon leakage and the factors influencing it, the distribution of carbon leakage across countries, measurement methods and results through the bibliometric analysis and meta-analysis. On the basis of this, three aspects of improvements worthy of further study were proposed.
Climate benefits of unilateral carbon policies are undermined by carbon leakage. To counteract leakage and increase global cost-effectiveness carbon tariffs can be imposed on the emissions embodied in imports from non-regulating regions. We present a stylized model analysis on the economic incentives for emissions abatement of producers subjected to carbon tariffs. The impacts of different carbon tariff designs are, then, quantified by an empirically based multi-sector, multi-region computable general equilibrium model of the global economy. We find that firm-targeted tariffs can deliver considerably stronger leakage reduction and higher gains in global cost-effectiveness than tariff designs operated at the industry level. Moreover, because the exporters are able to reduce their carbon tariffs by adjusting emissions, their competitiveness and the overall welfare of their economies will be less adversely affected than in the case of industry-level carbon tariff regimes.
This paper proposes that not only the size and component of carbon footprints are relevant to environmental policies but the border-crossing frequency associated with carbon footprints also has important policy implications, especially given that the fragmentation of production across national boundaries has been developing quickly in recent years. Based on the World Input Output Database, this paper traces carbon transfer along cross-border supply chains and proposes both the upstream and downstream decomposition of export rebates of the United States and the European Union. The carbon transfer from the United States and the European Union to other countries or regions is mainly through international trade in intermediate products, which may cross national borders multiple times. The multiple rebate revenue reaches 422.14 million dollars, and the problem of multiple rebates is much more serious for the sectors with a greater degree of global production fragmentation, such as the electrical and optical equipment sector. In addition, export rebates are mainly targeted at the carbon emissions that are generated in the electricity generation sector and embodied in exports.
To date, border carbon adjustment measures in the form of emissions allowance requirements (EAR) under the U.S. proposed cap-and-trade regime are the most concrete unilateral trade measure put forward to level the carbon playing field, and the U.S. EAR clearly targets major emerging economies, such as China. If improperly implemented, such measures could disturb the world trade order and trigger a trade war. Because of these potentially far-reaching impacts, this paper analyzes trade policy implications of the proposed EAR, and China’s responses. Scrutinizing the U.S. EAR against WTO provisions and case laws, the paper recommends what is to be done on the side of the U.S. to minimize the potential conflicts with WTO provisions in designing its BCA measures, and provides suggestions for China on how to effectively deal them to its advantage while being targeted by such proposed measures. The paper has argued that there is a clear need within a climate regime to define comparable efforts towards climate mitigation and adaptation to discipline the use of unilateral trade measures at the international level, and shows that defining the comparability of climate efforts can be to China’s advantage, and questions China’s same stance on this issue as India’s.
The Fifth Assessment Report of the Intergovernmental Panel on Climate Change, the most comprehensive assessment of the science relating to climate change ever undertaken, reported that with the 95 % certainty most of the global warming was being caused by increasing concentrations of greenhouse gases produced by human activities (IPCC 2014). Continued greenhouse gas emissions will cause further warming and have the potential to seriously damage our natural environment and affect the global economy and thus represent the world’s most pressing long-term threat to future prosperity and security. While no one would disagree that limiting climate change would require substantial and sustained reductions in greenhouse gas emissions, the thorny issue is that greenhouse gas emissions are embodied in virtually all products produced and traded in every conceivable economic sector. This requires a fundamental transformation of our economy and the ways energy is produced and used to effectively ad ...
This paper examines the impacts of the proposed carbon-based border tax adjustments (BTAs) on China’s trade, based on a multi-sector dynamic computable general equilibrium model including 7 energy sectors and 30 non-energy sectors and running up to the year 2030. Distinct from previous single China country models, our model disaggregates foreign accounts of China into four regions, including USA and the EU, to enable to examine the effects of re-routing trade flows. The results suggest that BTAs would have a negative impact on China’s trade. BTAs will directly decrease China’s exports, whereas Chinese exporting enterprises will accordingly modify their strategies. Moreover, BTAs will affect China’s total imports and sectoral import in an indirect but more intricate way. Furthermore, the simulation results for coping policies indicate that enhancing China’s power in world price determination and improving energy technology efficiency will effectively help mitigate the damages caused by BTAs.
This paper analyzes the economic and environmental impact on China of carbon tariffs from the perspective of the taxed countries based on a static global multi-regional economy-energy-environment (3E) CGE model. The results show that carbon tariffs will severely depress China's exports to the Annex I countries, and then have negative impacts on China's macro-economy. In terms of environmental effects, carbon tariffs indeed will reduce carbon emissions of China slightly, while such emission reduction effects will be offset by the increased emissions of Annex I countries led to by carbon tariffs. Carbon tariffs have a serious negative economic impact and very weakly positive environmental impact on the countries imposed carbon tariffs, which should be an important consideration for the reasonability and feasibility of carbon tariffs.
Putting a price on carbon is considered a crucial step for China’s endeavor of harnessing the market forces to reduce its energy consumption and carbon emissions. Indeed, aligned with China’s grand experiment with low-carbon provinces and low-carbon cities in six provinces and thirty-six cities, the Chinese central government has approved the seven pilot carbon trading schemes. These pilot trading schemes have features in common, but vary considerably in their approach to issues such as the coverage of sectors, allocation of allowances, price uncertainty and market stabilization, potential market power of dominated players, use of offsets, and enforcement and compliance. This article explains why China turns to market forces and is opt for emissions trading, rather than carbon or environmental taxes at least initially, discusses the five pilot trading schemes that have to comply with their emissions obligations by June 2014, and examines a wide range of design, implementation, enforcement and compliance issues related to China’s carbon trading pilots and their first-year performance. The article ends with drawing some lessons learned and discussing the options to evolve regional pilot carbon trading schemes into a nationwide carbon trading scheme.
Disparate commitments to reduce GHG emissions create demands for border carbon adjustments (BCAs) to prevent negative competitive effects and carbon leakage. BCAs that accomplish economic objectives and are administratively feasible, WTO-legal, and politically acceptable may be impossible. BCAs should be limited to a few basic energy-intensive and trade-exposed products and should be based on the lower of the carbon content of production in the importing country and actual carbon content, or perhaps “best available technology.” Whether the World Trade Organization (WTO) would condone BCAs is unclear. BCAs violating basic trade rules might qualify for a special exception.
Globally as well as in China, cities have contributed to most of economic output and have accordingly given rise to most of CO2 emissions. In particular, given unprecedented urbanization, cities will play an even greater role in shaping energy demand and CO2 emissions. Therefore, cities are the key to meeting its proposed carbon intensity target in 2020 and whatever climate commitments beyond 2020 that China may take. Given the paramount importance of cities, China is practicing low carbon city (LCC) development. Against this background, this paper first summarizes the general situation and main characteristics of China’s LCC development. The paper then indentifies eight problems and challenges for China’s LCC development including the absence of sound carbon accounting systems, lack of low-carbon specific evaluation system, rare use of market-based instruments, insufficient government-enterprise interactions, excessive budget dependence on land concession, increasing difficulty in further carbon mitigation, inevitable emissions growth due to rising living standards, and coal-dominant energy structure in the foreseeable future. Since these challenges are not applied to one or few cities, but are to all cities across the country, finally, the paper discusses how governments, in particular the central government, should address these problems and challenges. Given that China has faced great difficulty ensuring that local governments act in accordance with centrally-directed policies, the paper in particular discusses ways to incentivize local governments not to focus on economic growth alone and to move away from a heavy reliance on land concession. The paper ends with emphasizing on putting a price on carbon a crucial step for China’s endeavor of harnessing the market forces to reduce its energy consumption and carbon emissions and genuinely transiting into a low-carbon economy.
Carbon-based border tax adjustments (BTAs) have recently been proposed by some OECD countries to level the carbon playing field and target major emerging economies. This paper applies a multi-sector dynamic computable general equilibrium (CGE) model to estimate the impacts of the BTAs implemented by US and EU on China's sectoral carbon emissions. The results indicate that BTAs will cut down export prices and transmit the effects to the whole economy, reducing sectoral output-demands from both supply side and demand side. On the supply side, sectors might substitute away from exporting toward domestic market, increasing sectoral supply; while on the demand side, the domestic income may be strikingly cut down due to the decrease in export price, decreasing sectoral demand. Furthermore, such shrinkage of demand may similarly reduce energy prices, which leads to energy substitution effect and somewhat stimulates carbon emissions. Depending on the relative strength of the output-demand effect and energy substitution effect, sectoral carbon emissions and energy demands will vary across sectors, with increasing, decreasing or moving in a different direction. These results suggest that an incentive mechanism to encourage the widespread use of environment-friendly fuels and technologies will be more effective.
This paper examines whether the climate policy options policymakers are contemplating are compatible with core principles of the world trading system set forth in the General Agreement on Tariffs and Trade (GATT), the World Trade Organization (WTO), and Appellate Body decisions. The authors argue that border measures—both import restrictive measures and export subsidies—contemplated in US climate bills and the climate policies of other countries stand a fair chance of being challenged in the WTO. Given the prospect of foreseeable conflicts with WTO rules, the authors suggest that key WTO members should attempt to negotiate a new code that delineates a large “green space” for measures that are designed to limit GHG emissions both within the member country and globally. By “green space,” the authors mean policy space for climate measures that are imposed in a manner broadly consistent with core WTO principles even if a technical violation of WTO law could occur. To encourage WTO negotiating efforts along these lines, the authors recommend a time-limited “peace clause” to be adopted into climate legislation of major emitting countries. The peace clause would suspend the application of border measures or other extraterritorial controls for a defined period while WTO negotiations are under way.
Published as Policy Paper
In this chapter we provide an overview and interpretation of findings presented in this volume, while placing them in the context of the wider climate policy debate. We revisit the competitiveness issue and consider the findings presented in this book within the framework of the Porter hypothesis and Leibenstein's concept of X-efficiency, both of which have been quoted in support of more vigorous energy and climate policy. Carbon leakage, which refers to the displacement of emissions to non-carbon tax countries and regions, is a prominent concern in relation to specific industrial sectors and we examine the leakage rates identified here against the broader patterns of development in international trade and development, with particular attention directed towards developments in China and other emerging industrialized countries. The obvious challenge is to identify a formula that enables control while at the same time allowing for transformation of the global energy systems and continued economic growth, in particular in developing countries. https://scholar.google.com/citations?view_op=view_citation&hl=en&user=2SbncpMAAAAJ&citation_for_view=2SbncpMAAAAJ:P5F9QuxV20EC
This paper analyses the implications of the EU ETS for the power sector, notably the impact of free allocation of CO2 emission allowances on the price of electricity and the profitability of power generation. Besides some theoretical reflections, the paper presents empirical and model estimates of CO2 cost pass through, indicating that pass through rates vary between 40 and 100 percent of CO2 costs, or â in absolute terms â between 3 and 18 â¬/MWh, depending on the carbon intensity of the marginal production unit and other, market or technology specific factors concerned. As a result, power companies realise substantial windfall profits, indicated by empirical and model estimates presented in the paper. In order to avoid these windfall profits, the paper concludes that free allocation to power companies should be phased out in favour of auctioning.
We develop a methodology for testing Hicks's induced innovation hypothesis by estimating a product-characteristics model of energy-using consumer durables, augmenting the hypothesis to allow for the influence of government regulations. For the products we explored, the evidence suggests that (i) the rate of overall innovation was independent of energy prices and regulations; (ii) the direction of innovation was responsive to energy price changes for some products but not for others; (iii) energy price changes induced changes in the subset of technically feasible models that were offered for sale; (iv) this responsiveness increased substantially during the period after energy-efficiency product labeling was required; and (v) nonetheless, a sizable portion of efficiency improvements were autonomous.
The introduction of mandatory controls and a trading scheme covering approximately half of all carbon dioxide emissions across Europe has triggered a debate about the impact of emissions trading on the competitiveness of European industry. Economic theory suggests that, in many sectors, businesses will pass on costs to customers and make net profits due to the impact on product prices combined with the extensive free allocations of allowances. This study applies the Cournot representation of an oligopoly market to five energy-intensive sectors: cement, newsprint, steel, aluminium and petroleum. By populating the model with empirical data, the results are shown for three future emissions price scenarios. The results encompass the extent of cost pass-through to customers, changes in output, changes in UK market share, and changes in firm profits. The results suggest that most participating sectors would be expected to profit in general, Although with a modest loss of market share in the case of steel and cement, and closure in the case of aluminium.
The EU Emission Trading Scheme (EU ETS) that covers emitters from industry and the energy sector representing 40 percent of the EU's total greenhouse gas emissions is the biggest implementation worldwide of a cap-and-trade scheme. The EU ETS has been the core instrument of European climate policy since its start in 2005. Based on a database comprising more than 10,000 installations in 26 EU countries, this paper provides a thorough analysis of the performance of the EU ETS in the period 2005 to 2010. In the first part, we analyse allocation patterns – i.e., the stringency of allocation caps and distribution issues – on EU country and sector level comparing the results of the EU ETS pilot phase and the first three years of the Kyoto phase. In the second part of the paper, we assess trading flows of European Allowance Units (EUAs) between EU countries comparing the results for the first and second trading period. Furthermore, we analyse the use of credits from flexible mechanisms – Certified Emission Reductions (CERs) from CDM projects and Emission Reduction Units (ERUs) from JI projects – that installations may surrender since the beginning of the second trading period on country level.
The most cost-e¤ective policies for achieving CO 2 abatement (e.g., standard carbon taxes) are considered politically unacceptable because of distributional con-sequences. This paper employs a simple analytically tractable model along with a more complex dynamic numerical general equilibrium model to assess the impacts of CO 2 policies on key energy industries. We explore how CO 2 policies can be de-signed to avoid adverse pro…t impacts in these industries, and assess the costs of meeting these potential distributional objectives. We …nd that without substantial added cost to the overall economy, the gov-ernment can implement carbon abatement policies that protect equity values in fossil-fuel industries. The reason is that CO 2 abatement policies have the poten-tial to generate rents that are quite large in relation to the potential loss of pro…t. By enabling …rms to retain only a small fraction of these potential rents – e.g., by grandfathering a small percentage of CO 2 permits, or by exempting a small fraction of emissions from the base of a carbon tax – the government can protect …rms' pro…ts and equity values. Government revenue has an e¢ciency value because it can be used to …nance cuts in pre-existing distortionary taxes. Since the revenue-sacri…ce involved in protecting …rms' pro…ts is small, the e¢ciency cost is small as well. We also …nd that expanding the compensation e¤ort to include industries that signi…cantly use carbon-based fuels does not substantially add to the overall economic cost.
If the EU stands alone in adopting climate policy and imposes a strict emissions ceiling, competitiveness of EU energy-intensive sectors will be affected negatively. Relocation of EU energy-intensive firms to countries with a lax regime also leads to carbon leakage. However, when use is made of the opportunities of the Clean Development Mechanism these impacts are very modest. Border tax adjustments (BTAs) to ‘level the playing field’ between domestic and foreign producers may be considered to address the concerns about both competitiveness and carbon leakage. It is far from clear whether these measures are WTO-proof. Simulations show that both an import levy and an export refund restore competitiveness to a certain extent. BTAs may lower the costs for energy-intensive sectors, but induce higher costs for other sectors. This paper uses a general equilibrium model to quantify and assess the implications of a number of policy scenarios.
For the foreseeable future, climate change policy will be considerably more stringent in some countries than in others. Indeed, the United Nations Framework Convention on Climate Change explicitly states that developed countries must take meaningful action before any obligations are to be placed on developing countries. However, differences in climate policy will lead to differences in energy costs, and to concerns about competitive advantage. In high-cost countries, there will be political pressure to impose border adjustments, or “green tariffs”, on imports from countries with little or no climate policy and low energy costs. The adjustments would be based on the carbon emissions associated with production of each imported product, and would be intended to match the cost increase that would have occurred had the exporting country adopted a climate policy similar to that of the importing country. In this paper, we estimate how large such tariffs would be in practice, and then examine their economic and environmental effects using G-Cubed, a detailed multi-sector, multi-country model of the world economy. We find that the tariffs would be small on most traded goods, would reduce leakage of emissions reduction very modestly, and would do little to protect import-competing industries. We conclude that the benefits produced by border adjustments would be too small to justify their administrative complexity or their deleterious effects on international trade.
Europe faces the intertwined issues of debt, recession and economic uncertainty. These issues also impact its climate and energy policy, and in particular the EU Emissions Trading System (EU ETS). However, improvement to the EU ETS could enhance European prospects for economic stabilisation, investment and recovery. This report, Strengthening the EU ETS, analyses the underlying issues affecting the EU ETS, and sets out the main response options. The core conclusion is that no individual measure adequately addresses the combined needs: to restore confidence, to stabilise expectations, and to provide a strategic context for huge investment in the EU energy sector.
The United States has proposed, and the European Union (EU) developed, policies to mitigate the potential economic and environmental (i.e., "carbon leakage") impacts of carbon policies on energy- or greenhouse gas-intensive, trade-exposed industries. While studies have found little effect of carbon policies on EU competitiveness in the present, the EU decision to move toward auctioning of allowances in the future has spurred development of criteria to extend potential availability of free allowances to exposed industries to 2020. In a December 2009 decision, the European Commission (EC) listed 164 industrial sectors and subsectors deemed exposed sectors under appropriate European Parliament and Council directives. H.R. 2454, which passed the House on June 26, 2009, includes two strategies to address these concerns: (1) free allocation of allowances (similar to that of the EU), and (2) an international reserve allowance (IRA) scheme. Studies have suggested that a free allowance scheme appears effective in mitigating the trade-related impact of the carbon program on energy-intensive, trade- exposed industries. However, production cost for those industries (along with other industries) could increase because of the potential pass-through of compliance-related costs by upstream producers of various inputs into their manufacturing processes. Whether these costs would become significant would depend on the ability of upstream suppliers to pass on the costs, and the ability of the downstream industries to respond by increasing the efficiency of their operations or by substituting other, less-costly inputs into their processes. There are questions about whether the allowances provided by H.R. 2454's allocation scheme are sufficient. If the Environmental Protection Agency's estimates are correct, the allocation would appear sufficient. If industry estimates are correct, or if individual showings of eligibility prove significant, the pool of allowances provided by the bill would appear inadequate under the assumptions used here. Also, the data and administrative resources necessary to implement the program would be substantial. Although H.R. 2454 as passed would require EPA to establish an IRA program consistent with U.S. international agreements, questions may be raised as to whether proposed Part IV and its application would fully comply with U.S. international trade obligations. The distribution of free allowances may constitute actionable subsidies for purposes of the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures by possibly qualifying as "foregone revenue" when auctioning of allowances would also be permitted. In addition, the requirement that importers purchase IRAs to accompany particular imports might be found to constitute a prohibited import surcharge or, if the product may not otherwise enter the United States, a prohibited quantitative restriction under the General Agreement on Tariffs and Trade (GATT) 1994. While the IRA program might be provisionally justified under GATT general exceptions for health protection or resource conservation, the GATT also requires that it not be applied "in a manner that would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade." Whether an IRA program can be applied consistently with these requirements may depend on the type of program that may be crafted by EPA under the proposed legislation-that is, on the elements that would be required under the bill and the administrative possibilities inherent in its discretionary authorities. Absent an international consensus on the types of trade-related measures that may be applied as part of a domestic climate change regime, adversely affected countries may seek to challenge these measures under WTO dispute settlement provisions. Since neither the distribution of emission allowances nor border restrictions imposed as part of a domestic greenhouse gas-reduction program have yet come before WTO dispute settlement panels, WTO obligations and exceptions remain untested in this complex regulatory environment.
The World Bank has evaluated the developments and trends of the carbon market. The report shows that despite the turmoil in the financial market the global carbon market grew significant to an estimated value of more than €86 billion.
The objective of this chapter is to assess whether the carbon-energy taxes introduced under the environmental tax reforms (ETRs) that were implemented in seven European Union countries between 1990 and 2001 have had any impact on the competitiveness of selected industrial sectors in those countries. Underlying the analyses is a series of country datasets with each dataset containing generic data such as exchange rates and emission factors, and sector-specific data on energy use, energy prices and taxes, economic variables, and labour market variables. By definition, if an ETR raises the production cost of a firm, or the average production cost for a sector, then it has a negative impact on competitiveness compared to the (hypothetical) situation if the ETR had not been implemented - all else being equal. However, from a policy perspective it is more relevant to consider whether there has been any deterioration in competitiveness compared to the (actual) situation before the ETR was implemented.
This chapter assesses the macroeconomic effects of carbon-energy taxation introduced under unilateral environmental tax reform (ETR) in the 1990s undertaken in six member states of the European Union: Denmark, Finland, Germany, the Netherlands, Sweden, and the UK. The effects are estimated using the large-scale Energy-Environment-Economy (E3) model for Europe, E3ME, which covers the countries involved, as well as the complete single market, so that the effects on other economies can be considered, along with any effects on competitiveness. The method is to identify the key characteristics of the green tax reform packages and include these in the modelling of the price and non-price effects of the ETR on energy use and international trade in E3ME. The effects are then compared with a 'reference case' (i.e. a counterfactual case) generated by E3ME over the period 1995- 2012 including current and expected developments in the EU economy, e.g. the impact of the EU Emission Trading Scheme, but without the ETR. The ETRs caused a modest reduction in fuel use and greenhouse gas emissions in all six of countries and a very small increase in employment and GDP. All the ETRs were assumed to be revenue-neutral. The revenue recycling meant that the cost of ETR to the economy was significantly reduced and in several cases resulted in an increase in GDP. The method for revenue recycling strongly affects the results, as does the scale of exemptions offered to certain fuel user groups.
This paper employs analytical and numerical models to assess the welfare effects of a revenue-neutral carbon tax and (nonauctioned) carbon emissions permits, taking into account preexisting tax distortions in factor markets. The presence of preexisting taxes significantly raises the general equilibrium costs of both policies. This cost increase is much greater under emissions permits, since this policy does not generate revenues to reduce distortionary taxes. Under our central estimates emissions permits cannot increase welfare unless environmental damages exceed about $18 per ton of carbon. In contrast, an appropriately scaled carbon tax is welfare-improving so long as environmental damages are positive.
The Kyoto Protocol gives Annex 1 countries considerable flexibility in the choice of domestic policies to meet their emissions commitments. Possible climate policies include carbon/energy taxes, subsidies, energy efficiency standards, eco-labels, and government procurement policies. In order to meet their targets with minimum adverse effects on their economies, Annex 1 governments with differentiated legal and political systems are highly likely to pursue these policies that may have the potential to bring them into conflict with their WTO obligations. This paper explores the potential interaction between these domestic climate policies and WTO rules. It argues that their potential conflicts can be avoided or at least minimised if WTO rules are carefully scrutinised, and efforts are made early on to ensure that the proposed climate policies comply with them. It suggests an early process of pursuing consultations between WTO members and the Parties to the Climate Change Convention and points to the need of further exploring ways to enhance synergies between the trade and climate regimes. Copyright 2004 Blackwell Publishing Ltd.
The Clean Development Mechanism (CDM) is an offset mechanism designed to reduce the overall cost of implementing a given target for greenhouse gas (GHG) emissions in industrialized Annex B countries of the Kyoto Protocol, by shifting some of the emission reductions to Non-Annex B countries. This paper analyzes how CDM projects may lead to leakage of emissions elsewhere in Non- Annex B countries. Leakage occurs because emissions reductions under a CDM project may affect market equilibrium in regional and/or global energy and product markets, and thereby increase emissions elsewhere. We also account for potential reverse or negative leakage effects in Non-Annex B from higher emissions cap in Annex B. Our conclusion is that net leakage typically is positive and sizeable, thus leading to an overall increase in global GHG emissions when CDM projects are undertaken. Leakage is greater when the different fossil fuel markets are more segregated.
Second WTO Appellate Body ruling on U.S. restrictions on imports of shrimp harvested without adequate means to avoid trapping endangered species of turtles
The status and future technology, market, and industry opportunities for solar photovoltaics are examined and discussed. The co-importance of both policy and technology investments for the future markets and competitiveness of this solar approach is emphasized. This paper underscores the technology side, with a comprehensive overview and insights to technical, policy, market, industry and other investments needed to tip photovoltaics to its next level of contribution as a significant clean-energy partner in the world energy economy. The requirement to venture from near-term and evolutionary approaches into disruptive and revolutionary technology pathways is argued for our needs in the mid-term (the next 10–15 years) and the long-term (beyond the first quarter of this century).
WASHINGTON — President Obama on Sunday praised the energy bill passed by the House late last week as an "extraordinary first step," but he spoke out against a provision that would impose trade penalties on countries that do not accept limits on global warming pollution. "At a time when the economy worldwide is still deep in recession and we've seen a significant drop in global trade," Mr. Obama said, "I think we have to be very careful about sending any protectionist signals out there." He added, "I think there may be other ways of doing it than with a tariff approach." The passage of the House bill on Friday night was an important, if tentative, victory for the president, becoming the first time either chamber of Congress had approved a mandatory ceiling on the gases linked to global warming. Mr. Obama, hoping to build momentum in the Senate after the narrow victory in the House, delayed the start of a Sunday golf game to speak to a small group of reporters in the Oval Office. He acknowledged that the initial targets for reducing emissions of heat-trapping gases set by the House bill were quite modest and would probably not satisfy the governments of other countries or many environmental groups. But he said he hoped to build on those early targets in fashioning a more robust program in the future as part of his administration's efforts to move the nation from an economy based on fossil fuels toward one built on renewable energy sources. Mr. Obama predicted that similar energy legislation would face a difficult slog through the Senate and require months of tough negotiations and additional compromises. The horse-trading and vote-buying that helped House leaders secure a 219-to-212 victory will be magnified in the Senate, where several powerful committee leaders are already asserting authority and Democratic moderates hold more power than their counterparts in the House.
Nowhere has the divide between advocates and critics of globalization been more striking than in debates over free trade and the environment. And yet the literature on the subject is high on rhetoric and low on results. This book is the first to systematically investigate the subject using both economic theory and empirical analysis. Brian Copeland and Scott Taylor establish a powerful theoretical framework for examining the impact of international trade on local pollution levels, and use it to offer a uniquely integrated treatment of the links between economic growth, liberalized trade, and the environment. The results will surprise many. The authors set out the two leading theories linking international trade to environmental outcomes, develop the empirical implications, and examine their validity using data on measured sulfur dioxide concentrations from over 100 cities worldwide during the period from 1971 to 1986. The empirical results are provocative. For an average country in the sample, free trade is good for the environment. There is little evidence that developing countries will specialize in pollution-intensive products with further trade. In fact, the results suggest just the opposite: free trade will shift pollution-intensive goods production from poor countries with lax regulation to rich countries with tight regulation, thereby lowering world pollution. The results also suggest that pollution declines amid economic growth fueled by economy-wide technological progress but rises when growth is fueled by capital accumulation alone. Lucidly argued and authoritatively written, this book will provide students and researchers of international trade and environmental economics a more reliable way of thinking about this contentious issue, and the methodological tools with which to do so.
List of illustrations List of tables Authors Preface Acknowledgments 1. A market-based experiment 2. A political history of Federal Acid Rain Legislation 3. The political economy of allowance allocations 4. The pre-1995 trend in SO2 emissions 5. Title IV compliance and Emission reductions, 1995-97 6. Emissions trading: the effect on abatement behavior 7. Emissions trading: development of the allowance market 8. Title IV's voluntary compliance program 9. The cost of compliance with the Title IV in Phase I 10. Cost savings from emissions trading 11. Errors, imperfections, and allowance prices 12. Concluding observations.
This paper discusses the issue of whether environmentally sustainable growth is a feasible aspiration and, if so, how it might be brought about and how the levels of such growth would relate to those currently being experienced. Given the substantial accumulating evidence of serious environmental degradation from current patterns of economic activity, it is clear that these will need to be substantially changed if the ability of the natural environment to support large human populations is to be sustained. Such changes will need to be brought about by strong, sustained policy. Evidence presented in the paper suggests that the technological means of transforming current activities exist, and further evidence is also presented that, given efficient policy, these technologies may be widely implemented with relatively low costs. The key issue is the nature, strength and consistency of the policy signal. While environmental tax reform emerges from the analysis as probably the most promising policy approach, the paper ends with a rather sombre conclusion that, despite this policy instrument’s benefits, there are a number of political reasons why it is likely to be difficult to introduce.
The upcoming Copenhagen conference on climate change has led to calls for the United States to adopt a climate change abatement program in advance. In an effort to minimize adverse effects on certain domestic industries from higher energy costs, however, proponents of a cap-and-trade program for greenhouse gas emissions have loaded up their proposal with giveaways, loopholes, and barriers to imports from nations with less stringent emission caps. These trade measures are likely to be ineffective at best and harmful to U.S. interests at worst. First, the key targets of the proposed import barriers, India and China, are relatively minor sources of imports of energy intensive goods. Most carbon-intensive imports to the United States come from other developed countries that have stricter emissions controls than the United States and will therefore likely escape import penalties. Second, and more fundamentally, the trade provisions may be counterproductive. Global trade rules allow import barriers to protect the environment under certain conditions, some of which the main climate change bill appears to contradict. A trade dispute and possible retaliation is not in anyone’s interest, especially in a global downturn. Even if the United States was able to avoid formal dispute settlement proceedings, copycat regulations in other countries may be designed in a manner unfavorable to U.S. interests. To the extent that global warming is a real problem warranting action, it needs to be addressed globally rather than through unilateral efforts. Antagonizing trade partners through probably illegal trade measures will undermine efforts to secure global cooperation on climate change. A freer, more prosperous economy is a more auspicious path to ensuring a more rapid spread of environmental technology and the global consensus needed to combat climate change.
Through its Emissions Trading Scheme (EU ETS), the European Union is leading the world's first effort to mobilize market forces to tackle global climate change. This article, examines how the EU ETS has performed thus far, at the conclusion of the scheme's first trading phase (2005–2007). Insights drawn from this analysis may inform not only the scheme's future operation, but also the establishment of greenhouse gas trading programs outside Europe. This interim analysis finds that Phase I of the EU ETS (2005–2007) has successfully established a carbon price for significant segments of economic activity in Europe, as well as the necessary trading infrastructure and experience; that the price on carbon has so far had limited impact on the industrial competitiveness of European industry; that it has provided an important stimulus to greenhouse gas emission reductions outside of Europe, primarily through the Clean Development Mechanism; and that the EU ETS provides useful lessons for other countries seeking to limit GHG emissions and for future global climate negotiations.
The European Union Emissions Trading Scheme (EU ETS) is the world's first large experiment with an emissions trading system for carbon dioxide (CO2) and it is likely to be copied by others if there is to be a global regime for limiting greenhouse gas emissions. After providing a brief discussion of the origins of the EU ETS, its relation to the Kyoto Protocol, and its precedents in Europe and the U.S., this paper focuses on allowance allocation—the process of deciding who will receive the newly limited rights to emit CO2. We describe how allowances were allocated in the EU ETS, with particular emphasis on the issues and problems encountered, including the lack of readily available installation-level data, the participants in the process, the use of projections, the choices of Member States with respect to auctioning, benchmarking, and new entrant provisions, and the difficult issue of deciding to whom the expected shortage was to be allocated. Finally, we discuss the recently available data on 2005 emissions and what they indicate concerning over-allocation, trading patterns, and abatement. We conclude with some observations about the broader implications of the EU ETS, what seems to be unique about CO2, and the fact that non-economic considerations inform the allocation of allowances.
When regulated firms are offered compensation to prevent them from relocating, efficiency requires that payments be distributed across firms so as to equalize marginal relocation probabilities, weighted by the damage caused by relocation. We formalize this fundamental economic logic and apply it to analyzing compensation rules proposed under the EU Emissions Trading Scheme, where emission permits are allocated free of charge to carbon intensive and trade exposed industries. We show that this practice results in substantial overcompensation for given carbon leakage risk. Efficient permit allocation reduces the aggregate risk of job loss by more than half without increasing aggregate compensation.