Unilateral climate policy design: Efficiency and equity implications of alternative instruments to reduce carbon leakage

• Published in: Energy economics Vol. 34; no. Supplement; pp. S208 - S217
• Main Authors: Böhringer, Christoph, Carbone, Jared C., Rutherford, Thomas F.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.12.2012
• Subjects: Abatement; Border carbon adjustments; Carbon emissions; Cost; Cost analysis; Cost effectiveness; Efficiency–equity trade-offs; Energy economics; Energy policy; Environmental policy; Equality; Exemptions; Industry; Leakage; Output-based allocation; Pricing; Regulation; Saving; Unilateral climate policy; Leakage; Border carbon adjustments; Output-based allocation; Q2; Q43; Efficiency–equity trade-offs; Unilateral climate policy; H2; Exemptions; D61
• ISSN: 0140-9883; 1873-6181
• DOI: 10.1016/j.eneco.2012.09.011

Global cost-effectiveness of unilateral emission abatement can be seriously hampered by carbon leakage. We assess three widely discussed proposals for leakage reduction: carbon-motivated border tax adjustments, industry exemptions from carbon regulation, and output-based allocation of emission allowances. We find that none of these measures amounts to a “magic bullet” when both efficiency and equity criteria matter. Compared to unilateral emission pricing alone, border carbon adjustments are most effective in leakage reduction and promotion of global cost-effectiveness but can markedly exacerbate regional inequality; exemptions and output-based allocation tend to avoid distributional pitfalls but are less effective in leakage reduction and global cost savings; exemptions may even decrease global cost-effectiveness of unilateral emission abatement. ► We compare border tax adjustments, output-based allocation and industry exemptions. ► None of these measures is a “magic bullet” when both efficiency and equity criteria matter. ► Border tax adjustments cut leakage and provide global cost savings but exacerbate inequality. ► Exemptions produce very little leakage reduction and may imply higher efficiency cost. ► Output-based allocation does no harm to equity but also provides only little efficiency gains.